The difference between a provision and an accrual

Open a set of year-end accounts and you will meet two figures that seem to break an obvious rule: a cost recorded even though nothing has been paid. One is an accrual.

The other is a provision. Both are recognised before any cash changes hands, so they are easily treated as one thing.

They should not be. An accrual is a cost the business already knows it has run up.

A provision is an estimate of a cost it thinks probably lies ahead. The difference is certainty.

Recorded before the money moves

The two behave the same way when recorded. Neither waits for payment. Both add a cost to this year’s income statement and place a matching amount on the statement of financial position, before any ringgit leaves the bank.

To someone following the cash, they look identical. But what separates them is not when they are recorded. It is how sure the business is about what it records.

An accrual: a cost that has already happened

An accrual, or accrued expense, records something the business has used but not yet paid for. Suppose the year ends and RM800 of electricity has been used, but the bill has not arrived.

The electricity is gone. It was consumed in this year’s trading.

The cost definitely exists, and its size is known from the meter or the rate. Only the payment is outstanding. So the business records RM800 as an expense of this year and shows RM800 as owing.

Nothing is guessed. The event has happened and the figure is known.

A provision: an estimate of a cost that probably lies ahead

A provision works the other way round. The clearest example in the syllabus is the provision for doubtful debts. The business looks at what customers owe and accepts that, from experience, some of it will never arrive.

It cannot say which customers will fail to pay or how much will be lost. The loss has not happened yet, and for any one debt it may never happen. So it judges a likely proportion, perhaps a percentage based on past years, and sets that estimate aside as a provision.

The figure is deliberately an approximation. It rests on an expectation, not an event that has occurred.

The dividing line is certainty, not timing

You might say an accrual looks back and a provision looks forward. There is some truth in that, but both are recognised at the same moment, the year end, with payment still to come. The real dividing line is certainty.

An accrual rests on something that definitely happened, measured to a figure the business is confident about. A provision rests on something merely probable, measured to a figure it has had to estimate. That is why an accrual is often called a known liability and a provision an estimated one.

Why the certainty differs

An accrual is set off by a completed event: a service received, goods consumed, or time passed on a rent agreement. The event is over, so the cost is settled in substance. Only the timing of payment is open.

A provision is set off by prudence, the habit of acknowledging a likely loss before it is confirmed. Nothing has completed. The business sees a risk and chooses not to ignore it.

A finished event gives high certainty. A foreseeable one gives lower certainty, and an estimate is the honest best the business can do.

How each is resolved later

When the accrued bill is paid, the story closes. The amount owing disappears, and cash falls by the sum already recorded. The figure needs no revision.

A provision is different. Next year the business looks again at what customers owe, forms a fresh judgement, and revises the provision up or down.

An accrual is closed. A provision is reconsidered.

Different concepts behind each

An accrual is the matching concept at work. A cost caused by this year’s trading is set against this year’s revenue, paid or not, so profit reflects what the period actually used.

A provision is prudence at work. A probable loss is recognised early so assets and profit are not flattered by ignoring bad news the business can see coming. An accrual guards against understating cost. A provision guards against overstating value.

Telling them apart

When an unpaid or unrecorded cost appears in a question, ask whether the cost has definitely been incurred. If a service was received or a resource used up, and the amount is known or easily worked out, it is an accrual.

If the business is setting money aside against a loss that is only probable, with a figure it had to judge, not count, it is a provision. Reason from certainty, not from the fact that both come before payment.

If your child folds accruals and provisions into one idea, one of our teachers can separate them. We trace a known accrued expense from the day it is incurred to the day it is paid.

Then we set it beside an estimated provision that must be judged and revised. Book a trial class

Syllabus reference: Cambridge 0452 and 0985, syllabus for 2027 to 2029, sub-topic 4.3 Other payables and other receivables (page 14).