Provisions

By definition, provision is any amount written off or retained by  way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy. 

Often it is known that, in respect of some expense, a payment will have to be made in future, or that a loss will occur but the exact amount is not certain. If the amount were known with certainty, appropriate liability could be created by debiting the concerned expense or loss account. But since the amount is not certain and since it is only proper (and needful) that, before ascertaining the current year's  profit, the likely expenses or loss should be taken into account, the amount is estimated (call it guesstimated if it be so) and it is, by practice, set aside out of the current yea's revenues. When the actual amount of expense or loss is known, it can be met out of this set-aside amount (with, if need be, plus/minus adjustments). Such an amount, by defintion, is a provision. 

It is re-emphasised that Provisions are part of P & L A/c. 

Depreciation 

In fact, the amount of depreciation is also a provision since the exact amount of depreciation (loss in asset value due to wear and tear and even simply because of passage of time and the attendant inevitable exposure to weather and elements). By such a reasoning, the amount of depreciation is, it may be argued, to be debited to the P & L A/c and credited an account called PROVISION for DEPRECIATION A/c, bearing the asset intact. [Such practice can be seen in the publication of UNAUDITED FINANCIAL RESULTS (PROVISIONAL) for period ended (date) for wide circulation and public information (as in Newspapers).] (But once audited) in the BS, the asset is shown at cost less amount of the provision already created 

in respect of depreciation. 

Other Examples of Provisions are as under 

Provision for Gratuity 

Gratuity is to be paid to retiring staff depending on the length of service completed. On any date, who would in future qualify or be entitled cannot be known as well as what would be the entitlement payable to them. Since gratuity is to be paid for past service (at the date of retirement), the amount there of cannot, rightly, be debited to the P & L A/c (of that year), but the profits of the previous years should have been ascertained only after taking into account the amount payable (in future) in respect of gratuity. Obviously, this "ascertaining" can be done only "on an estimated basis", and then, the amount is credited to "Provision for Gratuity A/c" through an equal debit to the P & L A/c, year after year. When actual gratuity is paid, it is charged (debited to) against the "Provision . . ." and not against the "Revenues" of the year concerned. 

If, however, insurance policy is taken up for gratuity eventually payable, the premier thereof will be "expenses". This practice is gaining vogue. 

Provision for Taration 

For reasons of uncertain revenues, the several adjustments, deductions and exemptions applicable while computing taxes due, and the rates (inclusive of surcharges, etc.) applicable, the amount payable as income tax and other taxes in respect of current year's income cannot be ascertained exactly. Hence, only an estimate is made (can be made) in respect of taxes; the amount is debited to the P & L A/c and credited to the "Provisions A/c. If there is, eventually, a substantial difference between the amount of the provision and the actual tax, the difference is transferred to the P & L A/c as a separate item. This ensures that those who study the P & L A/c can distinguish the tax payable in respect of current year's income and the adjustment for previous years. Tax payment can be made also by "Advance Tax" on estimated income basis; once the actual liability is determined, advance tax paid and provision for taxation will be set against each other.