Provision (accounting)

Accountancy
Key concepts
Accountant · Accounting period · Bookkeeping · Cash and accrual basis · Cash flow forecasting · Chart of accounts · Journal · Special journals · Constant item purchasing power accounting · Cost of goods sold · Credit terms · Debits and credits · Double-entry system · Mark-to-market accounting · FIFO and LIFO · GAAP / IFRS · General ledger · Goodwill · Historical cost · Matching principle · Revenue recognition · Trial balance
Fields of accounting
Cost · Financial · Forensic · Fund · Management · Tax (U.S.)
Financial statements
Balance sheet · Cash flow statement · Statement of retained earnings · Income statement · Notes · Management discussion and analysis · XBRL
Auditing
Auditor's report · Financial audit · GAAS / ISA · Internal audit · Sarbanes–Oxley Act
Accounting qualifications
CA · CPA · CCA · CGA · CMA · CAT · CFA · CIIA · IIA · CTP

In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP, provision means an expense, while in IFRS, International Financial Reporting Standards, it means a liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense, while under IFRS, Provision for Income Taxes means Liability for Income Taxes Payable. Another examples is provisions for warranty costs [expense in the US and liability in IFRS]. Sometimes in IFRS, but not in US GAAP, the term reserve is used instead of term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board.^{[citation needed]} Reserve, which seems to be one of the most confusing terms in accounting, has the connotation of a debit balance to non-professionals but in accounting always means an account with a credit balance. Reserve for Warranties means estimated liability for future warranty repairs and replacements, NOT a pool of cash set aside for the firm to use in making repairs.

Provision: In IFRS, but not US GAAP, a present obligation which satisfies the rest of the definition of a liability, even if the amount of the obligation has to be estimated.

Provision can also be defined as the "liability of uncertain timing and uncertain amount" (Framework)

Provisions are defined under the AS-29 of Indian Accounting Standards

See also

• Balance sheet
• Income statement
• International Financial Reporting Standards
• IAS 37: Provisions, Contingent Liabilities and Contingent Assets

a business firm may consider it proper to set up some mechanism to protect itself from the consequences of unknown expenses and losses.