General Provisions

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Definition of 'General Provisions'

A general provision is an amount set aside in a company's financial statements to cover potential liabilities that are not yet known or estimable. This can include things like lawsuits, environmental cleanup costs, or product recalls. General provisions are not considered to be a liability until the event that they are used to pay for the expense.

General provisions are created by a company's management team and are based on their best estimate of the potential cost of the event. The amount of the provision is recorded as an expense on the company's income statement, and the offsetting entry is made to a liability account.

General provisions are reviewed and adjusted at least annually, and more often if there is a significant change in the likelihood or cost of the event. If the company determines that the provision is no longer needed, it can be reversed and the related expense removed from the income statement.

General provisions are an important part of a company's financial reporting because they help to ensure that the company is adequately prepared for potential liabilities. By setting aside money in advance, companies can avoid having to take on debt or issue equity to cover unexpected costs.

General provisions can be a significant expense for companies, and they can also have a negative impact on a company's earnings. However, they are an important part of financial reporting and can help to protect companies from unexpected liabilities.

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