Provision - simple meaning ?

The meaning the book has given me - a provision is a liability of uncertain time or amount. Can someone break this down for me ??

Comments

  • Zoynal98
    Zoynal98 MAAT, AATQB Posts: 65
    edited April 2017
    "A provision is a liability of uncertain time or amount" - I don't think it gets any simpler than this I'm afraid, I will try to break it down as much as possible :)

    For example:

    Provision for doubtful debts:

    Accounts Receivable account, Receivable, meaning that it hasn't been collected yet (the money/cash). There is a chance that a customer will not be able to pay for the goods/services bought. Therefore it is likely that it will become a Bad Debt; this is an expense. A prudent company would make a provision to estimate the amount of Bad Debt it is likely to receive for a period. This Provision is a Liability and wouldn't be classed as an expense (Bad debt is the double entry, as stated above) as you are covering potential future Liabilities.

    Hope this helps.
  • Bertie
    Bertie Registered Posts: 376
    An amount set aside out of profits in the accounts of a company for a known liability.
Privacy Policy