Gujarat BoardEnglish MediumSTD 11 CommerceAccountP2 C3 Provisions and Reserves3 Marks
Question
What is the importance of Provision ?
✓
Answer
Importance of provision is under: $(1)$ Provision is made for probable expenses, loss and liability of respective year and thereforeit is appropriated out of the revenue of the same year and hence true profit or loss ofthe business can be ascertained. $(2)$ Provision is made to prevent impact of transactions made during the year on the financialperformance in future. $(3)$ Known liability of future can be spread evenly over certain years by making provision. $(4)$ Assumption of going concern and principle of prudence can be followed by makingprovision. $(5)$ If provision is not made against decrease in the value of assests in future the capital ofthe business may be wiped off. Such risk can be avoided by making provision. $(6)$ Required funds can be managed by making provision of a certain amount every year outof the profit. On the expiry of the useful life of an asset, the managed funds can be usedto purchase new assets.
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