DIFF B/W PROVISION & PAYABLE

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Querist : Anonymous

Querist : Anonymous (Querist)

15 February 2011 PLZ
TELL THE DIFFERENCE BETWEEN PROVISION AND PAYABLE

ca cs shriyans jain

ca cs shriyans jain (Expert)
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15 February 2011 Provisions: It is the estimated amount which is set aside or retained by acompany for meeting the future liability whose amount cannot be determined with substantial accuracy. provision are made for liability which may occur in future.
Examples:Provision fordepriciation, Prov For Doubtful debt, Prov for taxation etc.

Payables:It is the actual amount of liability which has occured in an accounting year but not paid off.Its amount is not estimated one as it is actual. ITs a company obligation to payoff a short-term debt to its creditors. The accounts payable entry is found on a balance sheet under the heading current liabilities.

Querist : Anonymous

Querist : Anonymous (Querist)

15 February 2011 can u give some example in the way journal entry.
& as we show accounts payable in b\s.
whether we also show provision entry in b\s.

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Asha Kanta Sharma

Asha Kanta Sharma

(Expert)
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21 July 2024 Certainly! Let's clarify the difference between "provision" and "payable" with examples and how they are treated in financial statements:

### Provision:
A provision is a liability that is recognized on the balance sheet based on an estimated obligation that is likely to occur in the future. It is made in accordance with accounting principles (like GAAP or IFRS) to ensure that financial statements reflect the best estimate of the company's financial position.

**Example of Provision:**
Let's say a company is facing a lawsuit, and it estimates that it might have to pay $10,000 in legal fees as a result. The company recognizes a provision for this estimated liability:

- **Journal Entry to Recognize Provision:**
```
Legal Expenses Provision Dr. $10,000
Provision for Legal Expenses Cr. $10,000
```

Here, "Legal Expenses Provision" is debited to recognize the expense, and "Provision for Legal Expenses" is credited to record the liability on the balance sheet.

### Payable:
Accounts payable (AP) or trade payables are amounts owed by a business to its suppliers or vendors for goods or services purchased on credit. These are short-term liabilities that are expected to be settled by paying cash or through other means in the near future.

**Example of Payable:**
Suppose a company buys inventory on credit worth $5,000 from a supplier:

- **Journal Entry for Accounts Payable:**
```
Inventory Dr. $5,000
Accounts Payable Cr. $5,000
```

Here, "Inventory" is debited to increase the asset (inventory), and "Accounts Payable" is credited to record the liability to the supplier.

### Difference and Treatment in Financial Statements:

- **Provision**: It represents estimated future liabilities that are probable and measurable but may not yet have an invoice or specific due date. Provisions are shown on the balance sheet under current liabilities or provisions depending on the nature of the provision (e.g., provision for warranties, provision for bad debts).

- **Payable**: It represents actual amounts owed to external parties for goods or services already received. Accounts payable are also shown on the balance sheet under current liabilities.

In financial statements (such as the balance sheet):

- **Accounts Payable** is listed as a current liability under the heading of current liabilities.
- **Provisions** are also listed as current liabilities but separately from accounts payable, typically under specific categories like provisions or contingent liabilities.

### Summary:
- **Provision** is an estimated liability for future expenses or losses, recognized based on certain criteria (like probability and measurability).
- **Payable** is an actual liability for goods or services received but not yet paid for.

Both provisions and payables are crucial for accurately reflecting the financial position of a company, but they represent different types of obligations and are treated differently in financial reporting.