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Difference Between Provision and Liability

 

Provision and liability are two accounting concepts that represent different aspects of financial obligations or potential expenses for a business. Followings are differences between provision and liability:

  1. Provision: As per Ind AS 37,  provision is a liability of uncertain timing or amount.  In simple words  provision is an estimated liability or expense that is recognized in the financial statements based on a reasonable estimate of an anticipated future obligation. Provisions are made for uncertain events or obligations that are likely to occur but are not certain in terms of timing or amount. Key characteristics of provisions include:
  • Future obligations: Provisions are made for known or anticipated liabilities or expenses that are likely to occur in the future. They are recognized even if the exact timing or amount is uncertain.
  • Reasonable estimate: Provisions are made based on a reliable estimate of the potential future obligation. This estimate takes into account all available information, including historical data, expert opinions, and potential risks.
  • Impact on financial statements: Provisions are recorded as expenses in the income statement and as liabilities in the balance sheet. They reduce the reported profit and the net assets of the business.
  • Example: An example of a provision is a provision for bad debts, where a company estimates the potential amount of its accounts receivable that may not be collectible.
  1. Liability: As per Ind AS 37, a liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits. In simple words,  liability,  represents an actual present obligation of a business to transfer economic resources or provide services to another party as a result of past events or transactions. Liabilities are measurable and their occurrence is certain or highly probable. Key characteristics of liabilities include:
  • Existing obligations: Liabilities represent actual obligations or debts that the business owes to other parties, such as suppliers, lenders, or employees. These obligations arise from past events or transactions.
  • Measurable amount: Liabilities are quantifiable and can be reliably measured in monetary terms. The amount owed is usually determinable based on contractual agreements, invoices, or legal obligations.
  • Impact on financial statements: Liabilities are recorded in the balance sheet and represent a reduction in the net assets of the business. They may also result in interest expense or other costs that are recognized in the income statement.
  • Example: Examples of liabilities include accounts payable, loans payable, salaries payable, and taxes payable.

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