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Accrual vs Provision

Accrual vs Provision

Difference Between Accrual vs Provision

Accrual

Accrual basis of accounting of an expense means reporting of that expense and the related liability in the given period in which accrual expense occur. For example, employee expense that is due in November, but the payment of that expense will be not be made until December.

Similarly, accrual basis of accounting of sales to the reporting of that receipt and the related receivable in the given period in which accrual of sales is earned, and that period is later or prior to the cash receipt of that revenue. For example, interest income on the investment of bonds in November, but the cash will not come until January of next year.

Examples of Accruals includes the following

  • Interest Income and interest expenses
  • when a company delivers a good or service before taking cash
  • when a company records a salary expense before paying the employee with cash
  • Employee Bonus
  • Interest on Loans and advances
  • Insurance Premium
  • Interest Payable

Provisions

The Provision means keeping safety money aside against any probable future losses or payment that the firm might need to pay in future. It is uncertain and cannot be calculated exactly in advance. Still, the firm needs to make provisions for future losses in advance to cover these losses. For example, provisions for account receivables that the firm makes generally in advances made on future receivables that some of the receivables will turn bad and might not be recovered in future. There is a certain regulatory guideline that needs to be met and the firm should be able to justify the provisions made for the given period.

Types of Provisions

An organization may have a different type of provisions such as non-performing assets provision, a standard provision on assets, provision for depreciation, Provision for probable future losses on the sale of the fixed asset, provision for debtor which might not get recovered. In IFRS refers a provision as a reserve; generally, provisions and reserves are not the same concepts. Whereas a reserve is nothing but an organization’s profit, a provision is intended to cushion upcoming liabilities, set aside as a cushion the organization’s financial position through expansion or growth.

Few other examples of Provision are as below: –

  • Provision for Depreciation
  • Provision for non-performing assets
  • Standard provision for advances
  • Pension provision
  • Guarantees
  • Provision for bad debts

Head To Head Comparison Between Accrual vs Provision (Infographics)

Below is the top 4 difference between Accrual vs ProvisionAccrual-vs-Provision-info

Key Differences Between Accrual vs Provision

Both Accrual vs Provision are popular choices in the market; let us discuss some of the major Difference Between Accrual vs Provision

Accrual basis of accounting of an expense means reporting of that expense and the related liability in the given period in which accrual expense occur. The provision means keeping safety money aside against any probable future losses or payment that the firm might need to pay in future. It is uncertain and cannot be calculated exactly in advance.

Accrual amount is certain and can be easily taken out without future prediction. Provision is calculated based on future prediction, it is not certain and complex to estimate

Accruals might not result in a decrease in earnings, it might increase earnings also in the given period. Provision is always expensive and it is charged to income statement so it brings down earnings of the company.

Accrual vs Provision Comparison Table

Below is the 4 topmost comparison between Accrual vs Provision

Accrual Basis

Deferral Basis

Accrual works on matching principle of account which says, revenue reporting in a given period should be exactly matched with an expense in the same period. Provisions works on prudence principal of accounting which says that the company should anticipate profit later and it should make the required provisions for any future probable losses that can occur
Accrual amount is certain and can be easily taken out without future prediction. Provision is calculated based on future prediction, it is not certain and complex to estimate
Accruals might not result in the decrease in earnings, it might increase earnings also in the given period. Provision is always expensive and it is charged to income statement so it brings down earnings of the company.
Example- Insurance premium, Prepaid Expenses etc. Example- Provision for bad and doubtful debtors, Depreciation Provision etc.

Conclusion – Accrual vs Provision                                                      

Accrual vs Provision is an important method for financial accounting and reporting. The basic is to check the firm from making any cash inflows and outflow and it is always good to recognize expenses whenever they have taken place and it is always good to make provision whenever management feels certain amount can go bad in future because management runs the show and they knew about their clientele more than any other third-party member. Accrual accounting is an industry standard. New concepts like Accrual vs Provision are gaining traction to make accounting more ground connected to reality and meaningful to all the readers of financial statements.

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This has a been a guide to the top difference between Accrual vs Provision. Here we also discuss the Accrual vs Provision key differences with infographics, and comparison table. You may also have a look at the following articles to learn more.

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