How Do Provisions and Accrued Expenses Differ from Each Other?
To the untrained eyes, provisions and accrued expenses are the same as both seem like the preparation made for the expenses that may incur in the future. However, there is a significant difference between them, which is the level of certainty. If business owners (Also see Tips to Become Intelligent Business Owners) who have little knowledge in accounting insist on doing the complicated accounting tasks all by themselves, they may end up confusing themselves and messing up the books of accounts of their company. A better way of solving these issues that require professional treatments is to hire a bookkeeping services in Johor Bahru.
Compared to the accruals, the level of certainty for provisions to happen is far lower. Typically, businesses would make provisions for future obligations with uncertain dates and amounts. The provisions are more like a shield that protects the company from any losses that might happen and will probably influence the operation of the company.
Before one can record a provision in the company’s financial statements (Also see Financial Statements That Financial Accounting Generates), he needs to make sure that the transaction has met some requirements for it to be recorded as a provision. Provisions cannot be recorded without the existence of the present obligation. One should estimate the amount of that obligation carefully based on reliable facts or evidence. The most important thing is that he needs to make sure that the event is very likely to happen.
On the other hand, the accrued expenses (Also see Introduction to Accrued Expenses) are those that will certainly become due in the future. Such expenses incur because companies will typically buy or sell their goods or services on credit. Thus, whenever a company buys certain goods or services without paying the seller immediately, a credit transaction will occur. In such cases, if the expense has incurred and the company has not received an invoice from its supplier, the unpaid expense is called the accrued expense.
For example, if a public company has issued bonds, then it will record an accrued expense in its financial statements (Also see Which is the Most Important Financial Statement?) for the interests that it needs to pay to the bondholders. The company can determine the amount of interest payable to the bondholders. Thus, it can estimate this expense beforehand, and it can set aside a sum of money for this purpose.
Companies would allocate provisions towards the future obligations that are likely to happen, yet the occurrence is not certain. Provisions serve as the emergency fund of the company, and business owners will allocate them according to the logical predictions on the expenses that will probably incur in the future. On the contrary, the accrued expenses are the expenses that have incurred, but the company has not paid for it. These expenses will become due in the future, and they have specific amounts.