Importance of Provisions

                                   Importance of Provisions

1. Provision is an amount set aside out of current earnings considered necessary to provide for all losses that are expected to arise out of transactions entered into, during the accounting period.

2. Provision is made to retain future operating performance undisturbed by losses arising out of transactions of prior periods.

3. Provision is made following the Prudence Concept of accounting which holds "provide for all anticipated expenses and losses but do not provide for anticipated incomes. By making a provision, a part of the profits and corresponding assets are retained, which otherwise could have been distributed as profits.

4. Any loss or depletion in the value of an asset or any liability as may not have been provided against income or profit would effectively erode the capital of a business. Creation of Provisions is an attempt to maintain the capital of business intact.


Thus, Provisions represent (a) maintenance of capital, (b) adjustment of capital as is lost or eroded in the process of generation of revenue with current revenue and (c) a shield where loss arising out of past transactions does not affect result of future operations. The above discussion brings out the point that current income or profit cannot be measured without creating provisions. Provisions are accordingly, considered as a charge against revenue or profits.


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