Provision is a set-aside amount for anticipated future losses, and a loss contingency is a potential liability dependent on uncertain future events, categorized by likelihood and materiality in accounting.
1. Provision: - Definition: A provision is a liability or an amount set aside to cover a probable future expense or loss that is uncertain in terms of its timing or amount.
2 Purpose: Provisions are made to account for potential future obligations or losses. They are based on estimations and are intended to reflect a more accurate financial position.
3. Loss Contingency:- Definition: A loss contingency is a potential liability that may arise from past events and whose existence will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events.
4 Nature: Loss contingencies are categorized as possible, probable, or remote based on the likelihood of the event occurring. Accrual or disclosure is made based on the likelihood and materiality of the loss.
In summary, a provision is a recognized liability based on estimates, while a loss contingency is a potential liability contingent upon the outcome of uncertain future events.