Accrual vs Provision

Difference Between Accrual vs Provision

The difference between Accrual and Provision lies in the level of certainty they provide. While accruals or accrued expenses are costs that have already been incurred, though not paid off yet, provision is the possible expense toward future financial liabilities. Both terms are vital aspects of financial reporting and help users serve multiple purposes based on their understanding of the company’s financial position.

Accrual and Provision are equally crucial for the user. 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 shareholders. Provisions, as the name suggests, are the probable expenses, while accruals are the funds to use to take care of the already incurred costs.

• Accruals and provisions are two different accounting terms. Accruals refer to incurred expenses but unpaid. Provisions refer to possible expenses from financial liabilities. 
• Accrual and provisions terms are necessary for financial reporting and understanding a company's financial position.
• Accrual and provision are critical tools that aim to save the business from creating any heavy cash outflow. In addition, it is advisable to charge the income statement periodically whenever the business feels the necessity for any provisions.
• Accrual can be utilized for both costs and revenue. At the same time, the provision is utilized for future expenses.

Accrual vs Provision – Comparative Table

Let us now look at the head-to-head differences between Accrual vs. Provision.

Accrual	Provision
Accrual works on the matching concept that each revenue reporting in that period matches with an equal expense.	Provisions works on the prudence concept in accounting, which states that the business should never anticipate profits but should make all the provisions for any future loss that is going to occur.
The accrual amount is a specific amount that is also realized and certain.	The provision amount is uncertain and is a due amount, which is an estimation figure.
Accruals may or may not increase income all the time.	Making 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 debts, etc.

What is Accrual?

Accruals pertain to two things - revenue and expense. The accrual of any unpaid expenditure is listed in the ledger balance . The accrual of expense is known to be due in the future with certainty. Therefore, the payment characterization depends on the company's interpretation, i.e., provision or expenditure accrual.

Types

There are two types of accruals: accrual expense and accrual income. Accrual expense is when the company has received the services, but the payment has not been made.

For example, a bill of water that occurred in December but the payment for that has been made in January will be recorded as an accrued expense. On the other hand, when the company has provided services or goods, payment has not yet been received. An example is a rented office space. Although not paid in full, it 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

What is Provision?

The Provision refers to making an allowance against any probable future obligation that the company needs to bear. It is highly uncertain, and one cannot judge in advance. However, the company needs to make provisions to cover any such future uncertainty. For example, the provision for bad and doubtful debts that the company generally makes in advance based on future receivables that a certain percentage of the receivables will go bad and be uncertain to recover. A company should justify the provision made for that reporting period by meeting specific guidelines.

Types

IFRS, sometimes calls a reserve provision; 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. Companies may have different provisions, such as building provision for depreciation, Provision for future loss on the sale of assets, and provision for debtors, which can be expected to go bad and doubtful.

Other examples of Provision are:-

• Depreciations
• Pension provision
• Guarantees
• Provisions for bad debts

Accrual vs Provision Infographics

Here we provide the top 4 differences between Accrual vs. Provision.

Accrual vs Provision - Key Difference

Accrual refers to recognizing expenses and revenue that have been incurred and not yet paid. On the other hand, a provision is quite uncertain for any business, and hence the arrangement is made by companies to hedge any future potential losses.

The critical differences between Accrual vs Provision are as follows:

• Accrual refers to recognizing expenses and revenue already known by the firm and are visible shortly. On the other hand, Provision makes an amount for an unforeseen and inevitable.
• The objective of accruals is to report the correct numbers of revenue and expense for that period and forecast certain receivables and payables. In contrast, provision aims to protect the business from a heavy cash outflow in the future and make provision for any un-probable event.
•  Provision is only made for future expenses, whereas accrual is for both costs and revenue.
•  The Provisions are expected and uncertain, whereas accrual is certain, probable, and easily foreseen. Accrual and provision are made before the reports of the company are reported.

Similarities

Accrual and Provision is a critical 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 vital to report the correct numbers of the company. Accrual accountinghas often become an industry practice and should be considered by every company to make sense of their numbers. New concepts like Accrual and Provision are emerging to make accounting more meaningful and sustainable for all service users.

Recommended Articles

This article is a guide to what is Accrual vs Provision. Here, we explain the comparative table, infographics, key differences, similarities, and types. You may also look at the following articles: –

• Accrual Accounting Examples
• What is Accruals Concept in Accounting?
• Cash Accounting vs Accrual Accounting Differences
• Accrued Liabilities