Here are Provision For Expenses Journal Entry with Example. A provision for expenses is made to account for anticipated future expenses that are probable and can be reasonably estimated. This ensures that expenses are recognized in the period they are incurred, adhering to the matching principle in accounting.
Example Scenario
Let’s assume Company A expects to incur ₹20,000 for an upcoming legal expense. The expense is probable, and the amount can be reasonably estimated. The provision is made on 31-12-2024.
Journal Entry to Record the Provision for Expense
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 31-12-2024 | Legal Expense | 20,000 | Recording the provision for legal expense | |
| 31-12-2024 | To Provision for Expenses | 20,000 | Creating a provision for the expected expense |
Explanation:
- Legal Expense Account Debit: Increases the expense account, reflecting the anticipated legal expense.
- To Provision for Expenses Account Credit: Increases the liability account, indicating the provision made for the anticipated expense.
Recording the Actual Expense
When the actual expense is incurred, the provision is utilized to settle the liability. Let’s assume the legal expense is paid on 15-01-2025.
| Date | Account Title | Debit (INR) | Credit (INR) | Description |
|---|---|---|---|---|
| 15-01-2025 | Provision for Expenses | 20,000 | Utilizing the provision for legal expense | |
| 15-01-2025 | To Cash | 20,000 | Paying the legal expense |
Explanation:
- Provision for Expenses Account Debit: Decreases the liability account, utilizing the provision made earlier.
- To Cash Account Credit: Decreases the cash account, reflecting the payment of the legal expense.
Conclusion
Creating a provision for expenses ensures that anticipated expenses are recognized in the correct period, adhering to the matching principle. This practice helps maintain accurate financial reporting and better prepares the company for future outflows.