Provisions and contingent liabilities

What a provision is

A liability of uncertain amount or timing that is probable and can be reliably estimated — for example income tax payable, warranty claims, bonus, gratuity or leave encashment.

Entry

Estimated income tax for the year ₹3,20,000:

Income Tax Expense A/c          Dr  3,20,000
    To Provision for Tax A/c           3,20,000   (Provisions group)

When tax is paid: Dr Provision for Tax, Cr Bank. Any difference is adjusted next year.

Provision vs reserve

• Provision: a charge against profit for a known liability or loss.
• Reserve: an appropriation of profit kept in the business (e.g. General Reserve). It is not an expense.

Contingent liabilities

Possible obligations that depend on a future event (e.g. a disputed GST demand under appeal, a bank guarantee). They are not booked; they are disclosed in the notes to accounts.