Classification of Provisions

Classification of Provisions

Provisions can be broadly classified as follows:

1. Provision for Losses: An amount which is set aside out of the earnings of the company to meet losses, for example, (1) loss on account of depreciation on fixed assets, (2) loss on account of repairs and renewals etc.

2. Provision for Known Liabilities: Provision which is created for known liabilities or expenses which arise in future, for example, (1) Provision for Income Tax, (2) Provision for Dividend, (3) Provision for discount on Debtors and Creditors, (4) Provision for outstanding expenses such as outstanding salaries and wages, payment on retirement such as pension, provident fund, gratuity etc.

3. Provision for Unknown or Contingent Liabilities

Provision created for unknown or contingent liabilities, for example, (1) Provision for bad and doubtful debts, (2) Provision against disputed claims, (3) Provision against guarantee, (4) Provision  against  compensation, (5) Provision against payment of arrears of dividend.