Confused with provisions
I am confused with the concept of “Provisions” (in fact I never really understood them) and their accounting effects. I have a case where I’m looking at the cash flow statement and it has (Net profit + Depreciation + Allowance for end of service benefits => Operating profit before working capital change). Here is my question:
I researched and the following is what I found:
To create a provision: Debit Provision Expense
Credit Provision Liability
Ok this makes sense, just like a liability, you expense it and create a payables account and when you pay it the cash goes down. However, with allowance for end of service benefits, does the liability get reduced when we pay the employees who earn their compensation, and are we storing cash away every interval? If not, why did we add it back to our Cash Flow statement?