From accounting point of view provision means when a certain amount is kept separate for a particular purpose at a particular point of time, normally, at the time of preparation of final accounts. Provisions relate to expenditures only and are the part of profit and loss account. If the provision are not made then the correct position of profit or loss can be determined. Though, the amount and timings of expenditures may be uncertain, even then a reasonable amount must be kept separate to meet these uncertainties.
Following are few examples relating to provisions:-
Provision for Taxation:- Amount of Income tax, Sales Tax, Service Tax and Excise Duty etc., which are payable at the time of balance sheet preparation, will be shown under provision for taxation head.
Proposed Dividend:- Amount of dividend which is proposed but not paid.
Provision for Provident Funds and E.S.I. Schemes, Pension etc.:- Amount payable for Employer’s contributions and other expenses relating to above heads, will be shown under this head.
Provisions for Contingencies:- There may be some other contingencies which are not normal part of routine expenditures but apparently the liabilities is almost fixed, will be shown under this head.
Other Provisions:- Provisions for any other liabilities, will be shown under this head.
Treatment of Provisions in Final Accounts
First, the amount of provisions are debited in profit and loss account then these are shown in liabilities side of balance sheet.
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