Yes, you are saying it right.

Explanation:

Provisions are made in respect of future liabilities that are certain to be incurred. Let's discuss this statement in detail:

What are provisions?

Provisions are recognized and recorded in the financial statements of a company to account for future liabilities or losses that are likely to occur. They are estimated amounts set aside to cover any potential obligations or expenses that are expected to arise in the future.

Why are provisions made?

Provisions are made to ensure that the financial statements reflect the true and fair picture of the company's financial position. They are made based on the principle of prudence, which states that liabilities and losses should be recognized as soon as they are probable and can be reasonably estimated. By making provisions, companies can account for future expenses or liabilities that are likely to occur, even though the exact amount or timing may be uncertain.

What types of liabilities are covered by provisions?

Provisions can be made for various types of liabilities, such as:
- Legal or contractual obligations: Companies may need to set aside provisions for potential legal claims, warranties, or guarantees.
- Restructuring costs: Provisions may be made for costs related to restructuring activities, such as employee severance payments or asset write-downs.
- Asset impairments: If the value of an asset is impaired, a provision may be made to reflect its reduced value.
- Bad debts: Provisions can also be made for potential losses arising from non-payment of debts by customers.

How are provisions accounted for?

Provisions are recognized as a liability in the balance sheet and reported as an expense in the income statement. The amount of the provision is based on management's best estimate of the future obligation or loss. If the actual amount differs from the estimated provision, adjustments are made in subsequent accounting periods.

Conclusion

In conclusion, provisions are made in respect of future liabilities that are certain to be incurred. They are recognized in the financial statements to ensure that the company's financial position is accurately represented. By making provisions, companies can anticipate and prepare for future obligations or losses that are likely to occur.