Accrual and provision are both accounting concepts used to account for expenses and liabilities. Here are the key differences between accrual and provision:
Accrual:
• Definition: Accrual refers to the recognition of revenues or expenses in financial statements before the associated cash is received or paid.
• Purpose: Accrual accounting aims to match revenues and expenses with the period in which they are earned or incurred, providing a more accurate representation of financial performance.
• Timing: Accruals are made when there is an obligation or a right to receive or pay cash, even if the actual cash flow occurs in a different period.
• Examples: Accrued revenue represents revenue earned but not yet received, such as unbilled services. Accrued expenses represent expenses incurred but not yet paid, such as salaries payable or interest payable.
• Impact on Financial Statements: Accruals increase both the income statement and the balance sheet. They result in the recognition of revenue or expense in the income statement and the creation of a corresponding liability or asset on the balance sheet.
Provision:
• Definition: A provision is a liability or expense recognized in the financial statements based on an estimated future obligation or loss.
• Purpose: Provisions are made to account for probable future liabilities or losses, even if the amount or timing is uncertain.
• Estimation: Provisions involve estimating the amount of the liability or loss based on available information, including historical data, expert opinions, and legal obligations.
• Examples: Provisions include provisions for bad debts, provisions for warranties, provisions for legal claims, or provisions for restructuring costs.
• Impact on Financial Statements: Provisions increase both the income statement and the balance sheet. They result in the recognition of an expense in the income statement and the creation of a corresponding liability on the balance sheet
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In summary, accruals are adjustments made to reflect the timing of revenues and expenses, while provisions are recognized for estimated future obligations or losses.
Accruals are based on the matching principle, aiming to match revenues and expenses to the period in which they occur. Provisions, on the other hand, involve estimating future liabilities or losses based on available information.
Both accruals and provisions impact the income statement and the balance sheet, but for different reasons and under different circumstances.
