Provisions are charge on profits or appropriation of profits.

Provisions are------------- .charge on profits or appropriation of profits .....please answer with explanation.

asked Apr 14, 2016 in Trial Balance, Profit & Loss Account and Balance Sheet by PARDEEP (12 points) 1,954 views

1 Answer

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Difference between Reserve and Appropriation::
1. Basic nature : Actually a provision is a charge against the profits and not an appropriation of profit.
2. Purpose : Provision is created to meet a known liability of the current year the amount of which cannot be reasonably ascertained.
         For example at the time of closing the books of the current year, we are not sure of the exact amount of the closing debtors who will become irrecoverable, we can only make a rough idea.  For example there are closing debtors of Rs.50000, We make a rough estimate that 5% of these may become bad debts next year. Obviously we have to set apart Rs.2500 (Rs.50000 x 5% = Rs.2500) from the current year's profits.  This provision (Rs.2500 set apart in the current year) will be carried forward to the next year so that bad debts which occur next year will be debited to this provision and not to next years Profit and Loss A/c.  This provision is created because debtors belonging to the current year who don't pay are obviously a loss of the current year, though we may come to know of it only in the next year.  That is why Rs.2500 from current year's profits is set apart to meet loss on account of bad debts.
answered Apr 14, 2016 by jbsclasses (3,971 points)