The Accounting Act
stipulates that only the genuine profits should be accounted for in the balance
sheet, and that the accounting entity should take into consideration all
predictable risks and possible losses affecting its assets and liabilities and
known to the accounting entity at the time of balance sheet compilation. Also,
it should include all devaluations regardless of the fact whether the
accounting entity showed profit or loss in the accounting period. The
accounting entity is entitled to use provisions, adjustment entries and
write-offs for that purpose. Provisions are aimed to cover future expenses or
liabilities, whose purpose is known and which are expected to occur, but whose
timing or amount is uncertain. However, provisions may not be used to adjust
the value of assets.
Provisions may be
used only for the purpose for which they have been originally recognized.
Logically, a provision may only be used to the maximum amount in which it was
created; and a provision may not have a debit balance. The balance of reserves
at the end of the accounting period should be transferred to the subsequent
period. Accounting entities are obliged to review provisions entered in the
books at the end of the accounting period, and assess their tenability and amount.
If it is discovered that the reason for which the provision has been created
has lapsed, the provision should be dissolved in its full extent. If it is
discovered that the provision is for a different sum than it is due, it should
be adjusted. In the balance sheet, provisions should be accounted for under
liabilities.
The Provision Act
stipulates three types of provisions for enterprises: provision for repairs of
tangible assets, provision for cultivation of crops, other provisions (for the
removal of mud from a pond, for the redevelopment of plots affected by mining,
for the settlement of mine damage or provisions stipulated by special laws as
costs required to achieve, ensure or maintain revenues).
