How does a change in the Provision impact surplus?

• A. It increases surplus directly.
• B. It decreases surplus directly.
• C. It has no effect on surplus.
• D. It increases then decreases surplus.

Answer: (B)

A provision is a liability set aside for expected future costs. When you adjust the provision upward, you increase liabilities while assets stay the same, so the surplus (assets minus liabilities) falls by the same amount. In accounting terms, raising the provision often accompanies an expense, which also reduces net income and, through retained surplus, lowers the overall surplus.

For example, if assets are 100 and liabilities are 60 (surplus 40), increasing the provision by 20 makes liabilities 80, leaving surplus at 20. Decreasing the provision would do the opposite, increasing surplus. The given direction—surplus decreases directly when the provision increases—is why the correct choice is that option.