Difference Between Accrual vs Provision
Accrual and provision are both vital and essential aspects of financial reporting and serve the purpose to the user to understand in detail the state of the financial position of the company. Accrual and Provision are equally important for user perspective. An accountant keeping the books of accounts should ensure that the number is reported and recorded correctly in order to reflect the true picture to the management and the shareholders.
Accruals refer to the recognition of expense and revenue have been incurred and not yet paid. A provision, on the other hand, are quite uncertain for any business but are not totally uncertain hence the provision is made by businesses to hedge any future potential losses in the business.
In this article, we look at Accrual vs Provision in detail.
What is Accrual?
Accruals pertain to two things revenue and expense. The accrual of any expense is listed in the ledger balance unless it is paid in full. The accrual of expense is known to be due in future with certainty. The characterization of an expense depends on the interpretation of the company whether it is a provision or accrual of expense.
What is Provision?
The provision refers to making of an allowance against any probable future obligation that the company needs to bear in future. It is highly uncertain and cannot be judged in advance. However, the company needs to make provisions in advance to cover any such future uncertainty. For example provision for bad and doubtful debts that the company makes generally in advances made on future receivables that certain percentage of the receivables will go bad and will be doubtful to be recovered. There are also certain guidelines that need to be met and the company should be able to justify the provision made for that reporting period.
Accrual vs Provision Infographics
Here we provide you with the top 4 difference between Accrual vs Provision
Accrual vs Provision – Key Difference
The key difference between Accrual vs Provision are as follows –
- It refers to recognition of expense and revenue that are already known by the firm and are visible in near future. Provision is making of an amount for an unforeseen event where the occurrence of the event Is not certain
- The objective of accruals is to report the correct numbers of revenue and expense for that period and to forecast the correct receivables and payables. Whereas, Objective of Provision is to protect the business for a heavy cash outflow in future and make provision of any un-probable event
- Provision is only made for future expenses whereas, this is done for both expenses and revenue
- Provisions are expected and are uncertain whereas, accrual is certain and probable and is easily foreseen. Accrual and Provision is done before the reports of the company is reported
Accrual vs Provision Head to Head Difference
Let’s now look at the head to head difference between Accrual vs Provision
|Accrual works on matching concepts that each revenue reporting in that period should be matched with an equal expense||Provisions should work on prudence concept which makes that the business should never anticipate profits but should make all the provision for any future loss that is going to occur|
|The amount of accrual is a specific amount which too is realized and is certain||Provision amount is not certain and is an anticipated amount which is basically an estimation figure|
|Accruals may or may not result in an increase in income all the time||Making of provisions results in the decline in profits most of the time as it is charged to the Income statement|
|Example- Prepaid expense, Insurance premium etc.||Example- Depreciation Provision, Provision for bad and doubtful debtors etc.|
Types of Provision
Companies may have different kinds of provision such as building provision for depreciation, Provision for future loss on the sale of assets, provision for debtors which can be expected to go bad and doubtful. In IFRS sometimes calls a provision a reserve; otherwise, reserves and provisions are not interchangeable concepts. Whereas a reserve is part of a business’s profit, a provision is intended to cover upcoming liabilities, set aside to improve the company’s financial position through growth or expansion.
Other examples of Provision are:-
- Pension provision
- Provisions for bad debts
Types of Accrual
There are two types of accruals. Accrual expense and accrual income. Accrual expense is when the services have been received by the company but for which the payment has not been made.
For example, a bill of water which occurred in the month of December but the payment for that has been made in January these kinds of expense will be recorded as an accrued expense. On the other hand, when services or goods have been provided by the company, but payment has not yet been received. An example is a rent for an office space that has not yet been paid in full but is expected to be paid in the next fiscal period.
Other examples of Accruals are:-
- Employee Bonus
- Insurance Premium
- Interest Payable
- Interest on Loans and advances
Accrual vs Provision – Conclusion
Accrual and Provision is an important tool for financial reporting and accounting. The aim is to save the business from making any heavy cash outflow and it is better to charge the income statement at every period whenever the business seems that there some provision needs to be made. On the other hand, accrual is important to report the correct numbers of the company. Accrual accounting is often has become an industry practice and should be taken into consideration by every company to make sense to their numbers. New concepts like Accrual and Provision are emerging to make accounting more meaningful and sustainable to all the users of the service.
This has a been a guide to Accrual vs Provision. Here we also discuss the top difference between Accrual and Provision along with infographics and comparison table. You may also have a look at the following articles –