Accrued Expenses vs. Provisions: An Overview

In accounting, accrued expenses and provision💯s are financial obligations differentiated by their respective degrees of certainty.

All accrued expe🎐nses have already been incurred but have not yet been paid. They are certain. By contrast, provisions are funds alওlocated toward probable, but uncertain, future obligations.

They are a kind of a 澳洲幸运5官方开奖结果体彩网:rainy-day fund, built on educated guesses about fu♍ture expenses.

It can be difficult to draw clear lines between 澳洲幸运5官方开奖结果体彩网:accrued liabilities and provisions.💟 In some respects, the characterization of an expense obligation as either accrued or a provision can depend on a company's interpretation of the expense.

Accrued Expenses

All accruals are divided into either expenses or revenues. An accrued expense is a cost that has be🔥en incurred. It is certain that payment for it is due in the future.

For example, in a publicly listed corporation's 澳洲幸运5官方开奖结果体彩网:financial statements, there is an accrued expense amount for the interest that is paid to 澳洲幸运5官方开奖结果体彩网:bondholders each quarter. The company🅺 knows exactly how much it must pay and when it m✤ust pay it.

Interest payable on bonds is a known figure. It can be calculated well ahead of time, and money can be set aside for it in a very specific fashion. The accrued expense is listed in the ledger until payme🗹nt is actually distributed to the bondh🍷olders.

When companies buy and sell from each other, they frequently do so on creditܫ. A credit transaction occurs when an entity purchases merchandise or services from anothꦏer but does not pay immediately.

The 澳洲幸运5官方开奖结果体彩网:unpaid expenses incurred by a company for which no invoꦏice has been received fr♋om its suppliers or vendors are referred to as accrued expenses.

Other forms of accrued expenses include interest payments on loans, services received, 澳洲幸运5官方开奖结果体彩网:wages and salaries incurred, and taxes incurred. For all these, no invoices have been received and no payments have been made yet.

Provisions

Provisions are𝕴 similar to a rainy day fund for a business. They are funds purposefully set aside to pay ♛for anticipated but uncertain expenses.

For example, if a company's clients don't pay their bills or someone defaults on a loan, money put aside as provisions could be used to cover these losses. Likewise, provisions could be set aside to pay for probable income taxes.

Companies elect to make provisions for future obligations whose specific amounts or dates of incurrence are unknown. Provisions are like a hedge against possible losses that🌊 would impact business operations.

Provision Recognition Guidelines

General guidelines should be met before a provision can be justified and recorded. For example, the potential liability must be a constructive obligation or a legal obligation. It must be expected to make a financial impact on a company (such as a loss of value or funds).

In addition, provisions must represent probable outflows. Otherwise they would be contingent liabilities. The reported amount must be a reasonable estimate of what may be spent to settle the obligation at the end of the reporting period.

Key Differences

Special Considerations

Provisions for banks work a little differently than they do for corporations. Banks make loans to borrowers, which involve the risk that a loan will not be paid back. To protect against this, banks make 澳洲幸运5官方开奖结果体彩网:loan loss provisions.

Money set aside for loan loss provisions covers loans that have not൲ been paid back or monthly loan payments that have not been made.

Lꦿike corporations, banks recognize a loan loss provision as an expense.

The Bottom Line

Accrued expenses and provisio🦩ns are financial obligations that are differentiated primarily by the certainty of their costs.

Accrued expenses represent actual costs incurred that will be paid at a future date. Provisions represent money estimated and set aside for probable future expenses. The amount of expenses and date they 🧸will be paid are unknowℱn.