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Provisions for Expenses

Raj (Assistant) (56 Points)

28 August 2010

Please pardon my English and accounting knowledge

I have two Types of indirect expenses, related to current year, but that will only due next year (not Bad Debts & Discounts and first one repeats every year and sconnd one only once and no more).

I can’t forecast the exact amount of these expenses right now.

Do I have to make any provision/out standing a/c in current year to meet these expenses? Then how I assume the volume of provision?

What are the entries to be made in current year and next year of account books up to the payment of these expenses? After the payment, if any excess/short in provision a/c, what will be the entries to clear it?

your ealry reply will highly be appreciated

Thanks

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15 Replies

Faiz Ahmed ( Article Trainee) (1731 Points)
Replied 28 August 2010

Regarding your estimation of expense amount, if you are sure that the particular expense relates to current year with some degree of surety in amount.. It is better to create a provision. For this pass this entry:-

P&L A/c Dr.

To Provision for expense A/c.

If next year exact amount fall short or is excess then pass this entry next year:-

In case of shortage--- P& L A/c Dr.

To Provision for expense A/c.

In case of excess ---- Reverse of above....

The above explanation is regarding ,when your estimation is somewhat having a very high degree of surety.

If you are having a less degree of surety in amount and occurence , then create a reserve on the above expense. The difference will be on the lines that Provision on expenses will be charged to P & L.. On the other hand reserve on expense will not be charged to P&L. Reserve will be appropriation out of net profit . In simple words, such reserve will be created out of N/P after charging all expenses and provisions. Entry for Reserve---

P& L Appropriation A/c Dr.

To reserve on expense A/c

The above matter also explains the conceptual difference between Provisions & Reserves.

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Chinmay (Accounts Professional) (356 Points)
Replied 03 September 2010

I case of general practice, the audit may be done after 1-2 months of closing of the accounting year. So you have the data of actual expenses. So you are easily calculate the how much amt to be make provision!!!

I in case of theoretically FAIZ is correct.

A B B (Job) (104 Points)
Replied 14 October 2010

As per AS 29;

(1) There is present obligation

(2) Which have been arise due to past event

(3) And which will result in future outflow of economic embodying benefits

(4) And which can be measured with reasonable degree of estimation

If above all conditions are fulfilled you may proceed with provision.

Ravishankar K (Accountant) (461 Points)
Replied 28 March 2012

can you kindly explain the entry,,,

on 31 mar 2011 i made entry

telephone expenses ac dr --- 1500rs

provision for telephone expenses ac cr --- 1500 rs

and on 10 april i recd the telephone bills worth 1200/- kindly explain what the entry should be?

should i modify the journal entry made on 31-3-11 to Rs.1200 Rs. or shall i create a provision only after i receive the actual expenses, because i dont think so there will be any company who closes accounts on exact 31 mar, guess many companies make backdated entries, and is it good to make backdated entries, many times i make lot of backdated entries, so only after receiving tel bill can i make the amount of rs.1200 as provision?

Aarkay Food (Account Manager) (22 Points)
Replied 09 April 2016

Just Reversed the entry by excess amont.

Provision for Telephone Exp Dr....300

To Telephone Exp 300

Naration: Excess provision reversed.

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Aarthi.P (Accounts) (62 Points)
Replied 26 May 2016

Someone kindly clarify my doubt ., I understand that we book provision for expenses in March for expenses pertaining to March eg., Electricity charges, telephone charges., as they are pertaining to that FY, for which bills are yet to be received. But in many cases, we book provision based on actual bills, in such cases cant we directly book the expense, instead of creating a provision .

manjunatha.P.S (Account executive ) (21 Points)
Replied 17 June 2016

can we meke parovision entery for very month or it is only for the year end activity

Sonu Kumar (2 Points)
Replied 25 March 2017

Sir,

Can you explain why need Provision for Expenses, what it is?

Kindly explain.

Akshay Kulkarni (4 Points)
Replied 20 April 2018

If the bills are received from concerned department for payment, after the completion of the FY to which the expenses pertain then we cannot post aback dfated expenses becaise tax liability is calculated and relevant returns are filed,

On the other hand if we treat those expenses provisions (although the the amount is know for sure) it will serve both objectives

1) adding cost to P&L current year

2) you can very well post them in Apr next year