Can anyone please explain me why we make provision in accounts????
We should debit in P&L A/c expenditure incurred to earn income. But there will some will be some expenditure where i will come to know its exact monetary value in future only. But i need to close books on 31st march. Example income tax. It is also expenditure for business man. Even though i can calculate it, it comes certain only when income tax department accepts it. They will take around two years to process and accept. So i create provision to provide for such expense.
Ishaan
(Others)
(43 Points)
Replied 08 November 2009
Thank u so much. But can we place that amount(INCOME TAX) into Amount Payble account instead of creating provision??
triumph-CMA
(Chartered Accountant)
(503 Points)
Replied 08 November 2009
Requirement to create provision arises due to the applicability of Concept of Conservatism (or Prudence). According to this concept if there is likelihood of any loss or expenditure in future it must be recorded in the books immediately. But it should be noted that we can record only those items that can me expressed in terms of money therefor these items are recorded only when they can be ascertained.
Ishaan
(Others)
(43 Points)
Replied 08 November 2009
suppose i made provision for certain expense .Then accounting will be
for a Fin Year
EXPENSE(DR) PROVISION(CR)
for Other Fin Year(Say after realisation)
PROVISION(DR) BANK(DR)
is that correct??????
triumph-CMA
(Chartered Accountant)
(503 Points)
Replied 08 November 2009
As I said that provision is made to record a probable future loss, therefore it is charged to P/L acount. The journal entry to make provision is
P/L Account dr.
To Provision for ..... A/c
(Being provision created.)
triumph-CMA
(Chartered Accountant)
(503 Points)
Replied 08 November 2009
For example if thereis likelihood of arising an expnediture in respect of repairs and the estimated amount s. 1,000
P/L account Dr. 1,000
To Provision for Repairs A.c 1,000
(..........)
Provision is shown in the balance sheet.
Now in the subsequent year the actual repairs incurred amount to Rs. 800 the entry will be
Provision for Repairs Dr. 800
To Bank A/c 800
(....).
sivaram
(Asst Mgr-Taxation)
(6918 Points)
Replied 09 November 2009
Thanks Mr Dhirendra singh for your replies
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