What is the significance of creating provisions in the balance sheet?
August 12, 2023 | 40,00 EUR | answered by Christiane Fuchs
Dear Tax Advisor,
I have a question regarding the formation of provisions in the balance sheet and I hope that you can help me. In our company, a small retail business, we are currently working on preparing our balance sheet for the next fiscal year. I have noticed provisions as an important item, and I would like to learn more about them.
Currently, I am having difficulty understanding the significance of provisions in the balance sheet and why they need to be formed. I wonder if provisions reduce equity and what impact they have on the income statement. Additionally, I am struggling with the correct calculation of provisions, as I am unsure of which liabilities and risks need to be considered.
I am concerned that we may overlook important provisions or calculate them incorrectly, leading to an inaccurate representation of our financial situation in the balance sheet. Therefore, it is important for me to understand how the formation of provisions is correctly done and what significance it has for evaluating our financial position.
Could you please explain to me the significance of provisions in the balance sheet and why they are important? Could you also provide tips on how to accurately calculate provisions and which risks and liabilities need to be considered? I would greatly appreciate your assistance.
Best regards,
Zofia Hartmann
Dear Mrs. Hartmann,
Thank you for your inquiry regarding the formation of provisions in the balance sheet. Provisions are indeed an important item in the balance sheet as they serve to appropriately represent the company's future obligations and risks. They do not reduce equity, but rather ensure that the balance sheet provides the most realistic picture of the company's financial situation.
Provisions are created to account for uncertain obligations that, while not yet due at the balance sheet date, are likely to occur. This includes provisions for warranty claims, legal disputes, impending losses from pending transactions, or the obligation to dispose of assets at the end of their useful life.
Provisions impact the income statement as they are recorded as expenses. This reduces the company's profit as provisions anticipate the costs of future obligations. By forming provisions, the income statement is corrected and equity is not directly affected.
For the accurate calculation of provisions, it is important to carefully analyze and evaluate the company's potential obligations and risks. All known and probable liabilities should be considered, even if they are not yet quantifiable. It is advisable to seek support from an experienced tax advisor when calculating provisions to avoid errors and ensure an accurate representation of the financial situation.
I hope this information is helpful and answers your questions regarding the significance and correct calculation of provisions in the balance sheet. If you need further assistance or more detailed information, I am at your disposal.
Best regards,
Christiane Fuchs
