Provision is made for all known liabilities and losses give reason
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The accounting department merely makes an entry for the provisions as suggested by other departments.
A provision is an expenditure relating to a particular accounting period, but not falling due on the date of financial statements. Since the expenditure relates to a particular financial period, a provision needs to be made against the revenue generated in the said accounting period, failing which, the financial statements cannot be said to be showing a true and fair view. A provision can be an estimate as in the case of provision for doubtful debts or accurate as in the case of audit fee.
Provisions have to be properly calculated based on information available. Few provisions will be known from the information available after the date of the balance sheet.
Provision for income tax is calculated after the audit is completed and is sewn in to the financial statements to make the statements acceptable.
Some of the provisions are to be made based on a contract. Provision for audit fee is to be made based on the terms of engagement. A service contract such as maintenance contracts also have to be accounted based on the terms of the contract.
Some of the provisions are purely approximation based on past experience. When a computer or a TV is sold, the item comes with a manufacturer's warranty, which may extend beyond the date of the Balance sheet. How much of the liability is likely to arise after the date of balance sheet is an approximation.
Certain of the provisions are mandatory as in case of insurance companies which provide for unexpired risk.
A provision is an expenditure relating to a particular accounting period, but not falling due on the date of financial statements. Since the expenditure relates to a particular financial period, a provision needs to be made against the revenue generated in the said accounting period, failing which, the financial statements cannot be said to be showing a true and fair view. A provision can be an estimate as in the case of provision for doubtful debts or accurate as in the case of audit fee.
Provisions have to be properly calculated based on information available. Few provisions will be known from the information available after the date of the balance sheet.
Provision for income tax is calculated after the audit is completed and is sewn in to the financial statements to make the statements acceptable.
Some of the provisions are to be made based on a contract. Provision for audit fee is to be made based on the terms of engagement. A service contract such as maintenance contracts also have to be accounted based on the terms of the contract.
Some of the provisions are purely approximation based on past experience. When a computer or a TV is sold, the item comes with a manufacturer's warranty, which may extend beyond the date of the Balance sheet. How much of the liability is likely to arise after the date of balance sheet is an approximation.
Certain of the provisions are mandatory as in case of insurance companies which provide for unexpired risk.
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