What is a Provision?

A provision is the amount of an expense that an entity elects to recognize now, before it has precise information about the exact amount of the expense. For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence.

Accounting for a Provision

A provision should be recognized as an expense when the occurrence of the related obligation is probable, and you can reasonably estimate the amount of the expense. The relevant expense account is then debited, while an offsetting liability account is credited.

Presentation of a Provision

A provision is recorded in a liability account, which is typically classified on the balance sheet as a current liability. The accounting staff should regularly review the status of all recognized provisions, to see if they should be adjusted.

Example of a Provision

The accountant for Arbuthnot Enterprises reviews the latest report of the inventory oversight committee, and notes that they have identified $30,000 of inventory that is likely to be obsolete. She notes that the company’s existing provision for obsolete inventory is only $10,000, so she increases the provision by $20,000 to match the amount reported by the committee. This results in a $20,000 increase in the cost of goods sold in the current reporting period.