What is a Provision?

A provision is the amount of an expense that an entity elects to recognize now, before it has precise information about the exact amount of the expense. For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence.

Accounting for a Provision

A provision should be recognized as an expense when the occurrence of the related obligation is probable, and one can reasonably estimate the amount of the expense. The relevant expense account is then debited, while an offsetting liability account is credited.

Presentation of a Provision

A provision is recorded in a liability account, which is typically classified on the balance sheet as a current liability. The accounting staff should regularly review the status of all recognized provisions, to see if they should be adjusted.