Difference Between Accrual vs Provision
Accrual and provision are both vital and essential aspects of financial reporting and serve the purpose of the user to understand in detail the state of the financial position of the company. Accrual and Provision are equally crucial for the user perspective. An accountant keeping the books of accounts should ensure that the number is reported and recorded correctly to reflect the right picture to the management and the shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company's total shares.read more.
Accruals refer to the recognition of expense and revenue that have been incurred and not yet paid. A provision, on the other hand, is quite uncertain for any business but is not unclear; hence the arrangement 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 unpaid expense is listed in the ledger balanceLedger BalanceA ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.read more. The accrual of expense is known to be due in the future with certainty. The characterization of an expense depends on the interpretation of the company, i.e., either provision or accrual of expense.
What is Provision?
The provision refers to making an allowance against any probable future obligation that the company needs to bear in the future. It is highly uncertain, and one cannot judge 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 generally makes in advances made on future receivables that certain percentage of the receivables will go bad and will be uncertain to be recovered. Company should be able to justify the provision made for that reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more by meeting specific guidelines.
Accrual vs. Provision Infographics
Here we provide you with the top 4 difference between Accrual vs. Provision.
Accrual vs. Provision – Key Difference
The critical 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 shortly. Provision is making an amount for an unforeseen event where the occurrence of the event is not inevitable.
- The objective of accruals is to report the correct numbers of revenue and expense for that period and to forecast certain receivables and payables. Whereas, the Objective of Provision is to protect the business for a heavy cash outflow in the future and make provision of any un-probable event
- Provision is only made for future expenses, whereas accrual is done for both expenses and revenue
- Provisions are expected and are uncertain, whereas accrual is certain and probable and easily foreseen. Accrual and Provision are made before the reports of the company are reported.
Accrual vs. Provision Head to Head Difference
Let’s now look at the head to head difference between Accrual vs. Provision.
| Accrual | Provision |
|---|---|
| Accrual works on matching concept that each revenue reporting in that period should be matched with an equal expense. | Provisions should work on the prudence concept in accounting, which states 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. | The provision amount is not certain and is an anticipated amount, which is an estimation figure. |
| Accruals may or may not increase income all the time. | Making of provisions results in a 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 provisions, 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:-
- Depreciations
- Pension provision
- Guarantees
- Provisions for bad debtsProvisions For Bad DebtsA bad debt provision refers to the reserve made by a company to set aside an amount computed as a specific percentage of overall doubtful or bad debts that has to be written off in the next year.read more
Types of Accrual
There are two types of accruals: accrual expense and accrual income. Accrual expense is when the company has received the services but for which the payment has not been made.
For example, a bill of water which occurred in December but the payment for that has been made in January these kinds of expenses will be recorded as an accrued expenseAccrued ExpenseAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more. On the other hand, when the company has provided services or goods, but payment has not yet been received. An example is rent for an office space. Although not 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 a critical tool for financial reportingFinancial ReportingFinancial Reporting is the process of disclosing all the relevant financial information of a business for a particular accounting period. These reports are used by the stakeholders (investors, creditors/ bankers, public, regulatory agencies, and government) to make investing and other relevant decisions. read more 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 vital to report the correct numbers of the company. Accrual accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read more 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.
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