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)
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