Technical definition
A liability of uncertain timing or amount recognized when the applicable recognition criteria are met.
How it works
A present obligation from a past event is estimated using the best information available. The debit normally records an expense or asset component; the credit records the provision. Estimates are reviewed at each reporting date.
Everyday example
A probable warranty obligation is estimated at $6,000: debit Warranty Expense and credit Warranty Provision.
Common pitfall
A provision is not a discretionary reserve for general business risk; it requires a sufficiently specific present obligation.