Meaning And Objectives Of Provision

Meaning Of Provision
A provision is the sum of amount set aside by charging against the profit and loss account. It is created for meeting a known loss or liability. Provision is maintained for meeting an anticipated loss or liability of uncertain amount. Such amount of anticipated loss or liability can only be estimated. If the present regular transactions undoubtedly bring certain losses or liabilities of unknown amount in further then provisions should be made for them in current year's book. Such provisions should be made every year by debiting the profit and loss account without considering whether the business is in profit or loss. A provision is always created for the specific purpose. It is not for the distribution to the shareholders. The provision, in fact, reduces the figure of profit and not the figure of divisible profit.
Generally, a business maintains different types of provisions with some specific purposes. They are as follows:

* Provision for doubtful debts
* Provision for discount on debtors
* Provision for taxation
* Provision for repairs and renewals

Objectives Of Provision
Some of the important objectives of maintaining provisions are as follows:
* To Meet Anticipated Losses And Liabilities
Provisions are created for meeting anticipated losses and liabilities such as provision for doubtful debts, provision for discount on debtors and provision for taxation.
* To Meet Known Losses And Liabilities
Provisions are created for meeting known losses and liabilities such as provision for repair and renewals.
* To Present Correct Financial Statements
In order to present correct financial statements and to report true profit and financial position, the business must maintain provision for known liabilities and losses.