Provision - simple meaning ?

Pjdav

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

Zoynal98

"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

An amount set aside out of profits in the accounts of a company for a known liability.