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Is accrual the same as provision?

Is accrual the same as provision?
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    2. This answer was edited.

      Accruals

      Accrual means accounting for liability or revenue that is certain and has become due but is yet to be paid or received.

      Examples:

      • When a product is sold or services are provided but payment has not been received.
      • Interest on loans or advances.
      • Insurance premium.
      • Prepaid expenses.

       

      Provisions

      Provision is accounting for liability or a loss that is uncertain but can arise in future. The exact amount is not known or is uncertain.  A provision is an amount set aside for a probable future expense dependent on the happening or non-happening of an event.

      Examples:

      • Provision for bad and doubtful debts.
      • Provision for depreciation.
      • Provision for non-performing assets.

      Difference between Accrual expenses and provisions :

      Title Accrual Provision
      Definition Recognition of expenses and revenue incurred but not yet paid or received. Expenses which are yet to be incurred.
      Amount The amount is certain and known. The amount is probable and not known.
      Accounting principle Matching concept. Prudence concept.
      Estimation and accuracy The amount is not based on an estimation that can be quantified accurately. The amount is based on estimation and cannot be quantified accurately.
      Example Prepaid expenses, insurance premiums etc Provision for bad and doubtful debts, provision for depreciation etc

       

      • Accrual expenses are the expenses incurred but have not been paid yet. These are recognized in the accounting year in which they become due not in the accounting year in which they are paid.  Accruals can be for both revenue and expenses.

      For example: A business has to pay salaries for the month of April but salaries will be actually paid in the next month. So, the business will recognize the expenses in the month of April i.e. when it is actually incurred rather than in the month in which it is actually paid.

      The accounting entry in the books will be:

      Salary a/c                             ….1,000 [Dr]
      To Accrued expenses a/c          1,000[Cr]

      (Being  entry made for salary accrued)

       

      Accrued expenses                ….1,000 [Dr]
      To Bank a/c                                 1,000[Cr]

      (Being entry accounted for payment made)

       

      • On the other hand, provisions refer to amounts set aside by a business for probable future liabilities or losses. Provisions are recognized in the financial statements when the company become aware of the potential future obligation and the amount is based on an estimate.

      For example: Reliance Ltd. has an outstanding debtor – Amazon Ltd. in the books of account. The business premises of Amazon have caught a serious fire resulting in huge losses and Reliance Ltd is of the view that Amazon may not be able to repay the amount. A provision can be made in the books of Reliance Ltd. for the probable loss.

      • The accounting entry in the books will be:

      P&L a/c [Dr]
      To Provision for doubtful debts a/c [Cr]

      (Being provision for doubtful debts against outstanding dues of M/s Reliance created in the books).

      The main difference between accruals and provisions is the level of certainty. Accruals are the expenses which will occur and the amount of that is also known while provisions are dependent on the happening or non-happening of certain events in future and the amount is also not certain.

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    4. Accruals are not the same as provisions both are totally different from each other. Accruals and provision both are vital parts of accounts but work differently

       

      Accrual

      Accrual expense means the transaction that takes place in a particular period must be accounted for in that period only irrespective of the fact when such an amount has been paid.

      An accrual of the expenditure which is not paid will be listed in the books of accounts. These accruals can be further divided into two parts

       

      Accrual Expense

      Accrual Expense means any transaction that takes place in a particular period but the amount for it will be paid on a later period.

      For example- 10,000 for the month of March was paid in April month then this rent will be accounted for in the books in March

      These are the following accrued expense

      • Accrual Rent– Accrual rent means the amount for using the land of the landlord is paid at a later period than the period when it is put into use.
      • Insurance– Accrual insurance means the amount paid as a premium to the insurance company paid on a later period than the period when it is due
      • Expense- Acrrual expense means the amount for any expense paid on a later period then the period when it pertains to be paid
      • Wages- Accrual wages means the amount which is paid to employees on a later period than the period when the wages get due

       

      Accrual Revenue

      Accrual Revenue means any transaction that takes place in a particular period but the amount for it will be received on later period. For example- If interest of 10,000 on bonds for the period of March is received in April months then this amount will be accounted for in March. These are the following accrued revenue

      • Accrual Rent– Accrual rent means the amount for using the land of an entity by another party is received on a later period than the period when it was put into use.
      • Accrued Interest– Accrued interest means the amount of interest received on a later period than the period when it pertains to receive

       

      PROVISIONS

      Provision refers to making a provision/allowance against any probable future expense that the company might incur in the near future. This amount is uncertain and difficult to predict its surety.

      However, as per the prudence concept of accounting a company needs to anticipate the losses that will incur in the near future due to which provision is made.

      For example- A company has debtors of 10,000 but as per the company’s previous records company anticipates that 1% of debtors will become bad debts. So in this case company will make a provision of 1% that is 100 on it.

      There are various types of provisions which are-

      • Provision on Depreciation– Provision for Depreciation means a provision for future depletion of assets has been already created
      • Provision for Doubtful Debts– Provision for Doubtful Debts means a provision created against debtors that doesn’t seem to be recovered in the near future
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