What is a Provision?

[KJK]

My question is if the provision is an estimate then it should be also be treated as and used in budgeting.And we can very easily find the variances of our expenses.
Please tell me can we follow such a system in which we prepare full provisional accounts at the beginning of the year and then compare them with actual amounts at the year end?

[maani]

hi..
dear..this is not possible....coz it will not be useful...consider u have debtors of 50000 at the begning of the year and u ll make provision for bad debts on the basis of that 50000 at 10%
but at the year end if u ll have debtors amounting to 85000...then what u ll do...
do u think that to compare the provision of bad debts of 10% of 50000 and 10% of 85000 will be useful...
also making some provision on some balance at the start of year is senseless to compare it with the provision of year end balance

Ace

[Pracs]

If I understand you correctly,.. 'provisional accounts' are actually your budgets,.. but ofcourse these cannot replace the real good old 'historical accounting'. Large corporations ofcourse do rely alot on budgeted accounts and in 'normal circumstances' these are very much close to the 'actual historical accounts'. But then there are too many variable factors,.. sales and allied expenses may not always be accurate especially in case of trading companies / areas.... I guess you get what I mean..

"Allah does not change the state of people unless they change what is within themselves" Quran 1311

[Augustus]

I totally agree with PARCS but even if u want to make provisional account at the start of the year then u can do it but those accounts should be based on ur prior periods' results and moreover u must esatblish a chusion of +/- 10%, so that u can evaluate ur actual results

[KJK]

Well Maani Thanks for your information first of all.

You gave the example of provision, well if we consider the provision why can't we create a greater proviosion rather than a strictly calculated provision.I think that If we do this we can have no problem at all in making provisional Accounts for Bad debts Also.if debtors are 85000 then we can increase the provision accordingly.