Provisions for Expenses

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.

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.

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.

Just Reversed the entry by excess amont.

Provision for Telephone Exp  Dr....300

To Telephone Exp  300

Naration: Excess provision reversed.

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 . 

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

Sir,

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

Kindly explain.

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

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

Should GST amount be included in provision?

In Case of reversal of Provision , shall we treat this reversal as "Prior Period Income "  as per Income tax act, 

Dear Sir,

Please explain for salary accounting entry and provision entry.