Why are provisions made in the final accounts?

Provisions are made in the final accounts to account for future liabilities or losses that are anticipated.

Provisions are an essential part of financial accounting and reporting. They are amounts set aside to cover anticipated future liabilities or losses. These could be due to various reasons such as bad debts, depreciation, lawsuits, or any other unforeseen expenses. The main reason for making provisions in the final accounts is to ensure that the financial statements provide a true and fair view of the company's financial position.

In accordance with the prudence concept of accounting, businesses are required to anticipate future losses but not future gains. This means that if a business anticipates that it may incur a loss or liability in the future, it should account for it in the current accounting period. This is done by creating a provision, which is essentially a charge against profits. Provisions are therefore a way of ensuring that profits are not overstated.

For example, if a business sells goods on credit, there is always a risk that some customers may not pay. To account for this, the business would create a provision for bad debts. This provision is an estimate of the amount that the business expects to be unable to recover from its customers. By creating this provision, the business is ensuring that its profits and assets are not overstated.

Similarly, a business may create a provision for depreciation to account for the wear and tear of its fixed assets. This provision is an estimate of the amount by which the value of the assets has decreased during the accounting period. By creating this provision, the business is ensuring that its assets are not overstated.

In conclusion, provisions are made in the final accounts to ensure that the financial statements provide a true and fair view of the company's financial position. They are a way of accounting for future liabilities or losses that are anticipated, thereby ensuring that profits and assets are not overstated.