Provision Formulas

Provision Formulas

Provision is created for a current liability, which would be confirmed in future. The provision is recognized on the best estimates. Provision is calculated as percentage of some relevant factor i.e. (sales, accounting Profit).  Some famous provisions are;

1.   Provision for warranty

2.   Provision for Tax

3.   Provision for Doubtful Debt

Formulas of these provisions have been given below. These formulas have been explained in more details with examples in my other articles.

Provision for Warranty Formula

Provision for Warranty  = % of Warranty x Sales

Provision for Warranty Formula Example

Sales (Year 2001) = 200,000

Warranty Required = 10% of Sales

How much provision is required?

Solution

Warranty = % of Warranty x Sales

= 10% x 200,000

=20,000 (Provision for warranty)

Provision for Tax Formula

Provision for Tax =Tax Rate x Accounting Profit

Provision for Tax Formula Example

Profit before Tax = 250,000

Tax rate = 30%

What would be the provision for tax?

Solution

Provision for tax =Tax Rate x Accounting Profit

= 250,000 x 30%

=75,000 (Provision for tax)

Provision for Doubtful Debt Formula

Provision for Doubtful Debt = % of Doubtful Debt x Account Receivable

Provision for Doubtful Debt Formula Example

Account Receivable Closing balance = 100,000

Allowance for doubtful Debt = 10%

Calculate allowance for Doubtful debt?

Solution

% of Allowance for Doubtful Debt x Account Receivable

=10% x 100,000

=10,000 (Allowance for Doubtful Debt)