Defines a provision as: ‘Any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantialaccuracy.’

It will be noted that a provision is a charge against profits, but as distinct from a charge outstanding for payment or an accrued charge of which the precise amount can be ascertained, a provision is a charge of which the amount has to be estimated.

Thus, if a firm or a company has accepted responsibility in an action for damages, pending whilst the accounts are being made up, the amount of damages which will be payable must be estimated and included as a charge in the revenue accounts and as a liability in the capital accounts.

Similarly, where a loss is anticipated under a contract for work in progress at the date of drawing up the accounts, an estimate of the amount of the loss must be made and included in the accounts. In such a case, whilst all the anticipated loss may not be attributable to operations in the period under review, it is considered good accounting and prudent business practice to allow for the whole of the loss in such accounts. This follows the established accounting principle that anticipated losses must be accounted for but anticipated profits should not be shown in the accounts until such profits are realised. Provisions for possible bad debts are frequently required, and should always be made either as a result of detailed examination of each account or as a percentage of debtors, where any doubt exists as to the value of the debts.

Provisions, where material, should be shown separately in the Balance Sheet. It will therefore be necessary for at least one separate “Provisions” account to be opened.