---

Guest post by: Anil Kumar Gupta Become an Author

Tweet

---

---

In this web article we will also discuss:

1. Nature of Reserves or Provisions

2. Differences between reserves and provisions

3. Secret Reserves


Provisions are for known liability or losses, the amount of which cannot be determined with substantial accuracy. In order to ascertain, profit or loss as accurately as possible, it is necessary to make careful estimates of the amounts of such known liabilities or losses and charge these sums against revenue as representing losses or expenses of the period. The amounts so set aside are termed as 'provisions' .

Well, both interest and depreciation are an expense. But there is a small difference between the two. Interest is certain, the amount is accurate. It is a specific expense. Depreciation too is certain but the amount is estimated. Depreciation cannot be determined with accuracy. It depends upon the cost of the asset, its estimated life and estimated scrap value.

Since the life and the scrap value of the asset cannot be determined with accuracy, the amount of depreciation remains an estimate. Here depreciation is a provision. Every year some debts go bad. But no body can tell with accuracy as to how much debts will go bad. Bad debts are certain but the amount is not.

Since bad debts are certain, some amount must be kept aside to meet such a loss. But since the loss cannot be determined with accuracy, the amount set aside is an estimated amount. This is provision for bad debts.

Again every year, some discount is allowed to debtors for prompt payment, but no body can tell with accuracy as to how much debts will be collected promptly. Therefore, the amount of discount cannot be calculated with accuracy. Discount is certain but amount is not. The amount kept aside to meet the expense on account of discount can only be an estimate. It is called 'provision for discount'.

Again, every year some amount is spent on repairs. But no body can tell with accuracy as to how much amount will be spent on repairs. Repairs are certain but the amount is not. Thus, some amount must be retained to meet the expenses on repairs. But since the amount cannot be determined accurately, the amount set aside is an estimated amount. This is 'Provision for repairs'.

Provisions must be created, whether, there is any profit or not. They must be created even if there is a loss. Thus, one cannot find out profit or loss, without creating provisions. In short, two things are certain about provisions:

(a) they are essential

(b) they are estimated

Related Articles

  Nature of ReservesFunds or Provisions
  Build a Financially Strong Nonprofit with Cashflow Management
  Part Two: Build a Financially Strong Nonprofit with Cash Flow Management
  How to Negotiate Your Franchise Agreement
  Secret Reserves
  SME - EQUITY FINANCING INSTEAD OF BANK LOANS
  2.2 Sectoral performance III: Economic Report on Africa 2007
  Dont Blow the Boilerplate in Contracts
  Overview I: Economic Report on Africa 2007
  Genetic Tests and Group Health Plans
  Intellectual Property Protection Minimum Standards
  Executive Effectiveness: Becoming Highly Productive
  1.3 World macroeconomic imbalances: Economic Report on Africa 2007
  Dwindling Cash Flow is a Big Problem
  Russian Stocks & their Ruble Come Crashing Down! It could end up affecting you!
  Give An Edge To Your Business With Equipment Leasing
  The China Syndrome
  Features of a Marketing Agreement
  Should You Sign A Nursing Home Admission Agreement?
  Compensation Clawbacks

Related Forum Posts

Share this article. Fund someone's dream.

Newsletter

Get advice & tips from famous business
owners, new articles by entrepreneur
experts, my latest website updates, &
special sneak peaks at what's to come!

Name:
Email:

Popular Articles

Resistance to Change and How to Deal With It

The Secret to Resolving Workplace Conflicts

The Unsung Business Tool: Public Speaking

Suggestions

Email us your ideas on how to make our
website more valuable! Thank you Sharon
from Toronto Salsa Lessons / Classes for
your suggestions to make the newsletter
look like the website and profile younger
entrepreneurs like Jennifer Lopez.