A provision is an amount set aside in the accounts for an obligation that is likely but not yet certain in timing or amount - for example a provision for leave pay, warranty claims or bad debts.
What it means
Where a business probably owes something but cannot pin down the exact figure or date, accounting standards require it to estimate and recognise a provision rather than wait. This keeps the liability on the books and the related cost in the right period. A provision differs from an accrual mainly in the degree of uncertainty: an accrual is fairly certain, a provision less so.
Where it fits in
In a payroll context, a leave-pay provision recognises the cost of accrued leave that will eventually be paid out, even though the exact amount and timing depend on when employees take or are paid their leave. It sits as a liability until settled.
Key rules
- A liability of uncertain timing or amount.
- Recognised when an obligation is probable and estimable.
- Differs from an accrual by its greater uncertainty.
- Common examples include leave pay, warranties and bad debts.
