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| Corporate practice bd |
Provision for Expenses journal entry-with Practical Examples
A provision for expenses is an accounting practice where a company sets aside a certain amount of money to cover anticipated expenses that are not yet incurred or invoiced but are expected in the future. This practice ensures that the company's financial statements accurately reflect the liabilities and expenses for the period they pertain to, rather than the period they are paid.
Importance of Provisions for Expenses
1. Accurate Financial Reporting: Ensures that expenses are recorded in the period they are incurred, providing a true and fair view of the financial position.
2. Liability Management: Helps in managing future liabilities by setting aside funds in advance.
3. Compliance: Ensures compliance with accounting standards, which require expenses to be recognized when they are incurred, not when they are paid.
4. Budgeting and Planning: Assists in better financial planning and budgeting by anticipating future expenses.
Here, are some Examples of Provision for Expenses are includes:
1. Provision for Warranty Expenses
2. Provision for Bad Debts
3. Provision for Income Tax
4. Provision for salaries & wages
5. Provision for Gas Bill
6. Provision for Insurance Premium
7. Provision for Director Remuneration
8. Provision for phone Bill
Let’s start with practical Examples for better understanding-
Corporate Accounting Treatment:
Practical Examples- 01
A company sells products with a one-year warranty. Based on historical data, it estimates that warranty claims will cost about TK.5,000 for the year.
Provision for Warranty Expenses:
|
Date |
Ledger Head |
Debit (TK) |
Credit (TK) |
Remarks |
|
31.05 2023 |
Warranty Expense |
5,000 |
|
|
|
Provision for Warranty |
|
5,000 |
|
Narration: (To record Provision for Warranty Expenses).
Practical Examples- 02
A company estimates that 2% of its accounts receivable will be uncontrollable. At the end of the period, the accounts receivable balance
is TK200,000.Here ,(TK.200000@2%) =TK.4,000
Provision for Bad Debts:
|
Date |
Ledger Head |
Debit (TK) |
Credit (TK) |
Remarks |
|
16.08 2023 |
Bad Debt Expense |
4,000 |
|
|
|
Provision for Doubtful Accounts |
|
4,000 |
|
Narration: (To record Provision for Doubtful Accounts ).
Practical Examples- 03
A company estimates its income tax liability for the year to be Tk.15,000, based on its taxable income.
Provision for Income Tax:
|
Date |
Ledger Head |
Debit (TK) |
Credit (TK) |
Remarks |
|
20.09 2023 |
Income Tax Expense |
15000 |
|
|
|
Provision for Income Tax |
|
15000 |
|
Narration: (To record Provision for Income Tax ).