Provisions
From bib. source
A provision is similar to an accrued charge. The difference is that whereas an accrued charge such as an unpaid telephone bill is known very accurately a provision is not. It refers to a future liability which is expected to occur, but the amount and, possibly, the date of payment are uncertain.
To sum up the above, then, a provision is a charge that may change over time as it is an anticipated future due / owed payment (hence why it is similar to an accrual). This anticipated future due / owed payment is nonetheless more accurately characterized as a present liability, as while the obligation is to be executed in the future it exists in the present.
In addition to being a liability on the balance sheet, a provision is also included as a cost in the profit and loss account (Kind 1999, 31). Regardless, it should have no immediate effect on cash as actual “payments will be made at some time in the future¨ rather than now (Ibid).
Why is it that a provision has no immediate effect on cash, but does have an immediate effect on cost?
This is because, if profits should not be anticipated “by including in sales unsold stock at the end of the financial period¨ within the profit and loss account, that also means that present obligations for future payment could be executed as soon as there is revenue: “provisions should be made without delay for all known liabilities and anticipated losses¨ (Kind 1999, 32). This is known as the “accounting convention of ‘prudence´,¨ and is represented by the following adage: “anticipate the bad news and wait for the good news¨ (Ibid).
accruals profit_and_loss_account profit_and_loss_statement balance_sheet financial_period costs liability sale payments accounting_convention_of_prudence prudential_accounting
bibliography
- “The Profit and Loss Account in More Detail.” In Accounting and Finance for Managers, 25–37. The Fast Track MBA Series. Dover, NH: PriceWaterhouseCoopers, 1999.