Provision

A provision is a liability that is not recognized as a current liability because it is not expected to be settled within one year or the operating cycle, whichever is longer. Provisions are used to record the estimated cost of future events that are not yet known with certainty.

Provisions are created when a company has a legal or constructive obligation to make a future payment as a result of past events. The obligation must be probable and the amount of the obligation must be reasonably estimable.

There are two types of provisions:

* Contingent liabilities: These are obligations that may or may not exist, depending on the outcome of future events. Contingent liabilities are not recognized as provisions in the financial statements until it is probable that the obligation will be incurred and the amount of the obligation can be reasonably estimated.
* Estimated liabilities: These are obligations that are known to exist, but the amount of the obligation cannot be reasonably estimated. Estimated liabilities are recognized as provisions in the financial statements when the amount of the obligation can be reasonably estimated.

Provisions are recorded in the balance sheet as a liability. The amount of the provision is deducted from the company's equity to arrive at the net assets.

Provisions are used to record the estimated cost of future events that are not yet known with certainty. They are created when a company has a legal or constructive obligation to make a future payment as a result of past events. The obligation must be probable and the amount of the obligation must be reasonably estimable.

Provisions are important because they help to ensure that the financial statements are a true and fair representation of the company's financial position. By recording the estimated cost of future events, provisions help to prevent the company from overstating its assets and understating its liabilities.

Provisions are also important for investors and creditors. They provide information about the company's future obligations and help investors and creditors to assess the company's financial risk.