Provision is an amount set aside out of profit for one purpose for one year. The provisions for bad debts, provision for repair, provision for discount, provision for contingency are some examples of provision. In one accounting year there are expected losses that must be faced .by the management. There may be bad debts due to sale of goods on credit. The assets need repair for smooth working. There may be court case for breach of contract. All such circumstances need some money for keeping the business as going concern. The prudent management can separate money for meeting certain expenses. During next year if expenses are there, the provision is used to meet their demand. If the amount is not used by the end of the year it is transferred to the credit side of profit and loss account. Such amount cannot be used for any other purpose. So it is called provision.
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