Difference Wiki

Accrual vs. Provision: What's the Difference?

Edited by Sawaira Riaz || By Sumera Saeed || Updated on November 7, 2023
Accrual refers to the recording of revenues and expenses when they are incurred, while provision is a specific amount set aside for a probable future expense.

Key Differences

Accrual accounting recognizes economic events regardless of when cash transactions occur, emphasizing the matching of revenues with expenses at the time when transactions occur, not when payment is made or received. Provision, however, is an accounting principle that dictates setting aside an amount for a foreseeable liability or reduction in the value of an asset, even if the exact amount or timing is uncertain.
Sumera Saeed
Nov 07, 2023
In accrual accounting, income is recorded when earned, and expenses are reported when incurred, not necessarily when cash is exchanged. This method gives a more accurate picture of a company's financial health. A provision is more conservative; it's an estimated amount, acknowledging that something will likely need to be paid in the future, such as warranties or bad debts.
Sumera Saeed
Nov 07, 2023
The use of accruals ensures that financial statements reflect all relevant information about revenues and expenses. Provisions, on the other hand, are a way to anticipate potential future costs and represent liabilities that are uncertain in timing or amount.
Sumera Saeed
Nov 07, 2023
Accruals can represent both assets and liabilities; they can include accounts receivable, accounts payable, accrued rent, or salaries. Provisions are strictly related to liabilities and are not associated with receivables. They are recorded in a separate account and often reviewed to assess their adequacy over time.
Sara Rehman
Nov 07, 2023
The process of accrual is driven by the recognition principle, while the creation of a provision is driven by the prudence principle. Accruals do not necessarily represent cash outflows or inflows until the underlying event occurs, whereas provisions are set aside for expected outflows, affecting the company's financial reserves.
Aimie Carlson
Nov 07, 2023
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Comparison Chart

Definition

Recording of income and expenses when they are earned or incurred, regardless of when cash is exchanged.
Setting aside funds for a future liability or reduction in asset value, whose timing or amount is uncertain.
Sumera Saeed
Nov 07, 2023

Financial Statement Impact

Affects both the income statement and the balance sheet.
Primarily affects the balance sheet, creating or adjusting liabilities.
Sumera Saeed
Nov 07, 2023

Basis

Recognition principle, matching revenues with expenses.
Prudence principle, anticipating future expenses.
Sumera Saeed
Nov 07, 2023

Cash Flow

No immediate impact on cash flow.
May decrease current cash flow to cover future liabilities.
Sumera Saeed
Nov 07, 2023

Nature

Can represent both assets and liabilities.
Represents only liabilities.
Sumera Saeed
Nov 07, 2023
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Accrual and Provision Definitions

Accrual

The process by which businesses record transactions in the periods they occur.
Year-end accruals are necessary for accurate financial reporting.
Sumera Saeed
Nov 07, 2023

Provision

Supplies of food, drink, or equipment, especially for a journey.
They stocked up on provisions before the long hike.
Janet White
Nov 07, 2023

Accrual

Recognition of revenue or expenses that have been incurred but not yet paid.
The accrual of interest will be added to the loan balance.
Sawaira Riaz
Nov 07, 2023

Provision

The act of providing or preparing for a future need, especially in financial contexts.
They made a provision in the budget for potential equipment repairs.
Sawaira Riaz
Nov 07, 2023

Accrual

Accumulation or increase of something over time, especially benefits or debts.
Her vacation time accrual stopped during her unpaid leave.
Aimie Carlson
Nov 07, 2023

Provision

A financial term for setting aside money to cover a future liability.
The company made a provision for doubtful debts.
Harlon Moss
Nov 07, 2023

Accrual

An accrued expense or income that is recognized in the books before it is paid or received.
Accrual for the project's costs began as soon as the work was performed.
Sara Rehman
Nov 07, 2023

Provision

A clause in a legal document that stipulates a particular requirement or condition.
The contract had a provision that allowed early termination.
Sumera Saeed
Nov 07, 2023

Accrual

The accounting method that records revenues and expenses when they are earned, regardless of when the money is received or paid.
The accrual method showed a higher profit margin than cash-based accounting.
Sumera Saeed
Nov 07, 2023

Provision

Anticipating possible future scenarios and preparing accordingly in accounting or planning.
Financial provisions ensure the company can handle unforeseen expenses.
Janet White
Nov 07, 2023

Accrual

The act or process of accumulating; an increase.
Sumera Saeed
Mar 01, 2023

Provision

The act of providing or supplying something
The provision of health care.
The provision of rations.
Sumera Saeed
Mar 01, 2023

Accrual

Something that accumulates or increases.
Sumera Saeed
Mar 01, 2023

Accrual

An increase; something that accumulates, especially an amount of money that periodically accumulates for a specific purpose
Sumera Saeed
Mar 01, 2023

Accrual

(accounting) from the creditor's viewpoint, a charge incurred in one accounting period that has not been, but is to be, paid by the end of it.
Sumera Saeed
Mar 01, 2023

Accrual

Accrument.
Sumera Saeed
Mar 01, 2023

Accrual

The act of accumulating
Sumera Saeed
Mar 01, 2023

FAQs

When is accrual accounting required?

Generally, for publicly traded companies and when preparing financial statements according to GAAP.
Janet White
Nov 07, 2023

What is an accrual in accounting?

It's the recording of revenue or expenses when they occur, not when cash is exchanged.
Sumera Saeed
Nov 07, 2023

What does provision mean in financial terms?

A provision is money set aside to cover a future liability.
Sawaira Riaz
Nov 07, 2023

How does accrual impact financial statements?

It affects both the income statement and balance sheet by recognizing revenues and expenses in the period they occur.
Sumera Saeed
Nov 07, 2023

What types of transactions are recorded on an accrual basis?

Revenues earned and expenses incurred, regardless of cash transactions.
Sumera Saeed
Nov 07, 2023

How often are provisions reviewed?

Typically, they are reviewed each reporting period or when significant events occur.
Sumera Saeed
Nov 07, 2023

Do all companies use accrual accounting?

No, small businesses may use cash-based accounting, but larger companies often use accrual accounting.
Sumera Saeed
Nov 07, 2023

Is a provision a type of accrual?

While related, a provision is not an accrual but rather a liability for anticipated expenses.
Aimie Carlson
Nov 07, 2023

What's the difference between a provision and a reserve?

Provisions are for known liabilities, while reserves are for general future uncertainties.
Aimie Carlson
Nov 07, 2023

What's an example of a provision in a contract?

A clause stating that a tenant must give 30 days' notice before vacating.
Sumera Saeed
Nov 07, 2023

Are provisions recorded as expenses?

They are recorded as liabilities but reflect future expenses.
Sumera Saeed
Nov 07, 2023

Can provisions change over time?

Yes, they can be adjusted as more information becomes available.
Janet White
Nov 07, 2023

Does accrual accounting comply with GAAP?

Yes, it is the preferred method under GAAP.
Sumera Saeed
Nov 07, 2023

What happens if a provision is too high or too low?

It must be adjusted in future accounting periods to reflect better estimates.
Sumera Saeed
Nov 07, 2023

Can provisions affect a company's profit?

Yes, by recognizing anticipated expenses, provisions can reduce reported profit.
Sumera Saeed
Nov 07, 2023

Are accruals considered actual cash flow?

No, they represent transactions not necessarily related to immediate cash flow.
Janet White
Nov 07, 2023

Does accrual accounting affect a company's taxes?

It can affect the timing of tax liabilities.
Sara Rehman
Nov 07, 2023

Is accrual basis better than cash basis?

It provides a more accurate financial picture but is more complex.
Sara Rehman
Nov 07, 2023

Can individuals use accrual accounting for personal finances?

It's uncommon, but individuals could use it for a more comprehensive view of their finances.
Sara Rehman
Nov 07, 2023

Is a provision a current or long-term liability?

It can be either, depending on when the anticipated liability is expected to arise.
Sumera Saeed
Nov 07, 2023
About Author
Written by
Sumera Saeed
Sumera is an experienced content writer and editor with a niche in comparative analysis. At Diffeence Wiki, she crafts clear and unbiased comparisons to guide readers in making informed decisions. With a dedication to thorough research and quality, Sumera's work stands out in the digital realm. Off the clock, she enjoys reading and exploring diverse cultures.
Edited by
Sawaira Riaz
Sawaira is a dedicated content editor at difference.wiki, where she meticulously refines articles to ensure clarity and accuracy. With a keen eye for detail, she upholds the site's commitment to delivering insightful and precise content.

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