Provision
Also called: provisions
A liability for a cost a company will probably have to pay but whose amount or timing is uncertain, recorded with a best estimate.
A provision is recorded when there is a present obligation from a past event, a payment is probable and the amount can be estimated reliably. Recording it reduces profit; paying it later reduces the provision rather than profit.
Because provisions are estimates, releasing them can be used to lift profit in a weak year.
Example
A company that expects 3% of 10,000 pumps to need a ₹2,000 warranty repair records a provision of ₹6 lakh.
Learn more in these lessons
- Provisions, contingent liabilities and impairmentsWhat are provisions, contingent liabilities and impairments?
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