Difference Between Accrual vs Provision

Accrual and Provision are vital aspects of financial reporting and serve the user’s pAccrual and Provision are vital aspects of financial reporting and serve the user’s purpose to understand 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 shareholdersShareholdersA shareholder is an individual or an institution that owns one or more shares of stock in a public or a private corporation and, therefore, are the legal owners of the company. The ownership percentage depends on the number of shares they hold against the company’s total shares.read more.

Accrual refers to recognizing expensesExpensesAn expense is a cost incurred in completing any transaction by an organization, leading to either revenue generation creation of the asset, change in liability, or raising capital.read more 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 hedgeHedgeHedge refers to an investment strategy that protects traders against potential losses due to unforeseen price fluctuations in an assetread more any future potential losses.

In this article, we look at Accrual vs. Provision in detail.

What is Accrual?

Accruals pertain to two things – Revenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read morerevenue and expense. The accrual of any unpaid expenditure is listed in the [wsm-tooltip header=“Ledger Balance” description=“A ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.” url=“https://www.wallstreetmojo.com/ledger-balance/"]ledger balanceLedger BalanceA ledger balance is an opening balance that remains available during the start of each business day. It comprises of all the deposits and withdrawals, used in the calculation of the total funds left in an account at the end of the previous day.read more[/wsm-tooltip]. 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.

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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 debtsDebtsDebt is the practice of borrowing a tangible item, primarily money by an individual, business, or government, from another person, financial institution, or state.read more 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 periodReporting PeriodA reporting period is a month, quarter, or year during which an organization’s financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements.read more by meeting specific guidelines.

Accrual vs. Provision Infographics

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

Accrual vs. Provision – Key Difference

The critical differences between Accrual vs. Provision are as follows:

  • Accrual refers to recognizing expenses and revenueRevenueRevenue is the amount of money that a business can earn in its normal course of business by selling its goods and services. In the case of the federal government, it refers to the total amount of income generated from taxes, which remains unfiltered from any deductions.read more 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.

Accrual vs. Provision Head to Head Difference

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

Types of Provision

IFRSIFRSIFRS or International Financial Reporting Standards refers to a globally-accepted set of accounting and financial reporting guidelines for preparing and presenting financial statements. It ensures uniformity in accounting practice that makes financial records comparable across different reporting entities worldwide. Over the years, it has emerged as the new world standard in accounting.read more, 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:-

  • DepreciationsPension provisionGuaranteesProvisions for bad debtsProvisions For Bad DebtsA bad debt provision refers to the reserve made by a company to set aside an amount computed as a specific percentage of overall doubtful or bad debts that has to be written off in the next year.read more

Types of Accrual

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 anAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more accrued expenseAccrued ExpenseAn accrued expense is the expenses which is incurred by the company over one accounting period but not paid in the same accounting period. In the books of accounts it is recorded in a way that the expense account is debited and the accrued expense account is credited.read more. 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 BonusInsurance PremiumInsurance PremiumInsurance Premium is the amount paid by any individual or a corporate entity to cover themself from uncertain events resulting in heavy economic and non-economic losses.read more[wsm-tooltip header=“Interest Payable” description=“Interest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.” url=“https://www.wallstreetmojo.com/interest-payable/"]Interest PayableInterest PayableInterest Payable is the amount of expense that has been incurred but not yet paid. It is a liability that appears on the company’s balance sheet.read more[/wsm-tooltip]Interest on LoansInterest On LoansThe term “interest on loan” refers to the amount that a borrower is obligated to pay or a depositor is supposed to earn on a principal sum at a pre-determined rate, which is known as the rate of interest and the formula for interest can be derived by multiplying the rate of interest, the outstanding principal sum and the tenure of the loan or deposit.read more and advances

Accrual vs. Provision – Conclusion

Accrual and Provision is a critical tool for financial reportingFinancial ReportingFinancial reporting is a systematic process of recording and representing a company’s financial data. The reports reflect a firm’s financial health and performance in a given period. Management, investors, shareholders, financiers, government, and regulatory agencies rely on financial reports for decision-making.read more and accounting. The aim is to save the business from making any heavy cash outflow, and it is better to charge the income statementIncome StatementThe income statement is one of the company’s financial reports that summarizes all of the company’s revenues and expenses over time in order to determine the company’s profit or loss and measure its business activity over time based on user requirements.read more 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 accountingAccrual AccountingAccrual Accounting is an accounting method that instantly records revenues & expenditures after a transaction occurs, irrespective of when the payment is received or made. read morehas 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 accountingAccountingAccounting is the process of processing and recording financial information on behalf of a business, and it serves as the foundation for all subsequent financial statements.read more more meaningful and sustainable for all service users.

This article is a guide to Accrual vs. Provision. We discussed the top differences between accrual and provision (infographics) and the comparison table. You may also look at the following articles: –

  • Accrual Accounting ExamplesWhat is Accruals Concept in Accounting?Cash Accounting vs Accrual Accounting DifferencesAccrued Liabilities