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Definition of Provision in Accounting

>> May 8, 2009

In general words provision means system to complete any work . But accounting provides very technical definition of provision . In small business like shop , general store , there is no need to make any provision , so you will find minimum reference in basic accounting books but from time to time business expands and reaches at corporate level . It needs to understand the real meaning of provision and what is its importance and how can it implement in business accounting .
In very simple accounting term , " Provision is that action of business in which business organisation reserves his money for future losses for safeguarding business ."

Now from this definition we get idea that it is the part of profit or money which we receive from sale or from debtors because money of sale , money of debtor and even money of other fixed asset which is saved and reserve for fulfilling losses due to bad debts , depreciation , income tax and other losses which we can not forecast . But for any loss we make different provision accounts like provision for doubtful debts , provision for depreciation , provision for income tax .
Because in real sense this is the part of profit of shareholder which should be give to shareholders in the form of dividend but we did not give them due to security of business , so it must be shown in the liability side of business with that given % and should also provide footnote that this is provision and taken for "________" purposes .

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