01-30-2009, 05:37 PM
Gazliz,
Provisions are basically the accounting estimate which should be made prudently considering all expected effects. However, so many accoutning estimate prove to be critical and there appear some uncertainities attached with their calculations.
If you have made a provision for loss contingency and actual cash outflow in subsequent period exceeded the provision, this is not a thing to worry about or to alter the previously reported figures. For instance if your provision (expense and liability) was Rs. 10 in year 2007 and the actual cash flow was Rs. 15 in year 2008, you simply pass the following accounting entries in year 2008
To record the amount exceeding the last year's provision
.......Expense - further provision DEBIT Rs. 5
............Provision for loss contingency (liability) CREDIT Rs. 5
and;
To pay off the liability
.........Provision for loss contingency DEBIT Rs. 15
........................... Bank account CREDIT Rs. 15
This is very simple you see.
Aftab,
I must place on record that provisions are the accounting estimates and either these are provided or reversed, these don't have to affect retained earnings directly. Instead these have to be charged or reversed in P/L account. No change in accounting estimate directly affects the retained earnings unless it is made as a result of change in some accounting policy. I think you overlooked it.
Regards,
KAMRAN.
Provisions are basically the accounting estimate which should be made prudently considering all expected effects. However, so many accoutning estimate prove to be critical and there appear some uncertainities attached with their calculations.
If you have made a provision for loss contingency and actual cash outflow in subsequent period exceeded the provision, this is not a thing to worry about or to alter the previously reported figures. For instance if your provision (expense and liability) was Rs. 10 in year 2007 and the actual cash flow was Rs. 15 in year 2008, you simply pass the following accounting entries in year 2008
To record the amount exceeding the last year's provision
.......Expense - further provision DEBIT Rs. 5
............Provision for loss contingency (liability) CREDIT Rs. 5
and;
To pay off the liability
.........Provision for loss contingency DEBIT Rs. 15
........................... Bank account CREDIT Rs. 15
This is very simple you see.
Aftab,
I must place on record that provisions are the accounting estimates and either these are provided or reversed, these don't have to affect retained earnings directly. Instead these have to be charged or reversed in P/L account. No change in accounting estimate directly affects the retained earnings unless it is made as a result of change in some accounting policy. I think you overlooked it.
Regards,
KAMRAN.
