Should the provisions for losses and expenses be assimilated to equity or debt? Explain

provision is an amount set aside from a company’s profits for an expected liability or for the decreasing value of an asset, though the specific amount might be unknown An amount from profits that has been put aside in a company's accounts to cover a future liability is called a provision. The main purpose of a provision is to adjust the current year balance to become more accurate. This is because there may be costs that could be accounted for in either the previous financial year, or the current financial year. Costs that belong to a certain year can become misleading if accounted for in previous or future accounting years, depending on the circumstances. A few facts about provisions A provision is in fact not a form of savings, though it may appear so at first glance. In accounting, provisions are recognised on the balance sheet and also expensed on the income statement. The resulting impact of a provision is a reduction in the company's equity. Setting aside a provision There are a number of factors that could cause a company to create provisions, however there are certain criterions that must be fulfilled before a financial obligation can be viewed as a provision, such as: The company must perform a reliable amount of regulatory measurement of that obligation. The measurement must be made by company management. It must be probable that the obligation results in a financial drag on economic resources. An obligation must be a result of events that will advance the balance sheet date, and could result in a legal or constructive obligation. An obligation must be determined to be probable, but not certain. It must be estimated to have a more than 50% probability of occurring.

Thanks for invitation,

Agree with the answer of our colleague "Srinivasn".

A provision is in fact not a form of savings, though it may appear so at first glance.

 

In accounting, provisions are recognised on the balance sheet and also expensed on the income statement. The resulting impact of a provision is a reduction in the company's equity.

 

Setting aside a provision

 

There are a number of factors that could cause a company to create provisions, however there are certain criterions that must be fulfilled before a financial obligation can be viewed as a provision, such as:

 

The company must perform a reliable amount of regulatory measurement of that obligation. The measurement must be made by company management.

It must be probable that the obligation results in a financial drag on economic resources.

An obligation must be a result of events that will advance the balance sheet date, and could result in a legal or constructive obligation.

An obligation must be determined to be probable, but not certain. It must be estimated to have a more than 50% probability of occurring.