Journal Entry for Provisions
A provision in accounting refers to a portion of profits set aside to meet specific future contingencies. These are reserves created for particular situations and must be utilized only for those purposes. A provision represents a probable liability and should not be considered as savings. The journal entry for provision is recorded to reflect the amount reserved by the business to cover such contingencies.
Provisions Journal Entry
Example 1: (Provision for Bad Debts)
A 5% provision for bad debts is to be maintained on debtors totaling ₹50,000. Record the necessary journal entry.
Solution:
Example 2: (Provision for Income Tax)
A provision for income tax amounting to ₹20,000 is to be created. Record the necessary journal entry.
Solution:
Example 3: (Provision for Depreciation)
A provision for depreciation amounting to ₹8,000 is to be created. Record the necessary journal entry.
Solution:
Example 4: (Provision for Repairs and Maintenance)
A provision for repairs and maintenance amounting to ₹4,000 is to be created. Record the necessary journal entry.
Solution:
Example 5: (Provision for Pension)
A provision for pension amounting to ₹10,000 is to be created. Record the necessary journal entry.
Solution:
Disclaimer: The content on this website is for informational purposes only and does not constitute legal, financial, or professional advice. Please consult qualified experts before acting on any information. K M GATECHA & CO LLP accepts no liability for errors, omissions, or outcomes from the use of this content. This site is not an advertisement or solicitation.
Need Help?
Frequently Asked Questions (FAQs)
Q1. What is a provision in accounting?
A provision is an amount set aside from profits to cover a known liability or contingency whose exact value is uncertain but can be reasonably estimated.
Q2. How is a provision different from a reserve?
A provision is created to meet a specific liability or expected expense, while a reserve is created to strengthen the financial position or meet future unknown needs.
Q3. Is a provision considered an expense?
Yes, provisions are treated as expenses in the profit and loss account since they represent anticipated obligations of the business.
Q4. Why is a journal entry for provision necessary?
A journal entry for provision ensures that all probable liabilities are accounted for, giving a more accurate picture of the company’s financial position.
Q5. What is the general journal entry format for creating a provision?
The usual entry is:
Expense Account Dr.
To Provision Account
This shows that the expense is recognized, and a liability (provision) is created.
Q6. When are provisions reversed?
Provisions are reversed when the liability no longer exists, or the actual expense is paid or incurred.
Q7. Are provisions mandatory for all businesses?
While not every provision is mandatory, certain provisions like those for depreciation, taxation, and doubtful debts are essential for accurate financial reporting.
