Question

Provisions are amounts set aside out of profits and other surpluses for:

• A. Meeting known or unknown contingency that may arise in future.
• B. Meeting an eventuality arising out of revaluation of assets in ordinary course of business
• C. Meeting a liability arising out of arbitration
• D. Meeting a liability, the amount of which can be determined with exact figure

Answer 1

Answer: (B)

A provision is an amount that you put in aside in your accounts to cover a future liability.

The purpose of a provision is to make a current year’s balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year. These costs that distinctly belong to a specific year could be misleading if accounted for in the future.
A provision is not a form of saving, even though it is an amount that is put aside for a future possible cost or obligation. Provisions resulting impact is a reduction in the company's equity.
When accounting, provisions are recognized on the balance sheet and then expensed on the income statement.