Depreciation, Provisions and Reserves

for expected repair and renewal of the fixed assets. Examples of provisions are : Provision for depreciation; Provision for bad and doubtful debts; Provision for taxation; Provision for discount on debtors; and Provision for repairs and renewals. It must be noted that the amount of provision for expense and loss is a charge against the revenue of the current period. Creation of provision ensures proper matching of revenue and expenses and hence the calculation of true profits.

Provisions are created by debiting the profit and loss account. In the balance sheet, the amount of provision may be shown either: By way of deduction from the concerned asset on the assets side. For example, provision for doubtful debts is shown as deduction from the amount of sundry debtors and provision for depreciation as a deduction from the concerned fixed assets; On the liabilities side of the balance sheet alongwith current liabilities, for example provision for taxes and provision for repairs and renewals. .

. Accounting Treatment for Provisions The accounting treatment of all types of provisions is almost similar. Therefore, the accounting treatment is explained here taking up the case of provision for doubtful debts.