Question

Under what conditions should a provision be recorded?

Short answer

While considering the expense in the income statement, the company needs to record the liability for the same in the balance sheet as a provision.

Step-by-step solution

Definition of Provision

Provision is defined as an amount that is usually set aside out of profit so as to incur all the anticipated expense or depreciation in the asset value, although the exact amount is yet to be ascertained.

Conditions required for recording of provision

Provisions are generally recorded when an expense is listed by the company in the income statement, and then liability is recorded for the same in the balance sheet. Typically, provisions are recorded in the form of bad debts, unused inventory, and allowances made for sales.

They occur in the balance sheet of the company within the current liabilities section of the liabilities account.