What is Provision?

A provision in accounting is an amount set aside from profits to cover a probable future liability or a loss, the exact timing or amount of which is uncertain. It is recorded as a liability on the balance sheet. This is different from a contingent liability, which is only disclosed in footnotes.

For Startups: A common provision for startups is a "provision for doubtful debts." If a startup has a large accounts receivable balance and believes some customers may default, it can create a provision to proactively recognize this potential loss, rather than waiting for the debt to become bad. This provides a more conservative and realistic view of the company's assets.

Example: A company has ₹10 Lakhs in receivables. Based on historical trends, it expects 2% will not be collected. It creates a provision for doubtful debts of ₹20,000.