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Distinguish between contingent liabilities and provisions
Contingent liabilities and provisions are governed by the international accounting standards 37 (IAS 37). The main objective is to match asset and liabilities = income and expenses in a particular financial year, so that the financial statements reflect in a realistic manner.
Provision
It is the present obligation that arises due to previous events. Provision decreases asset values. This is for bad debts and doubtful debts are commonly recorded debts.
Over provision or under provision are recognised by comparing with the previous years and are charged in an income statement. Provision amount is decided on the company’s policy.
The basic accounting treatment for provision is as follows −
| Expense A/c Provision A/c | Debited | Credited |
Contingent liability
It is recognised based on future events and a reasonable amount is estimated. If the estimation amount is not possible, then these may not be recorded in financial statements.
The basic accounting treatment for contingent liability is as follows −
| Cash A/c accrued liability A/c | Debited | Credited |
Differences
The major differences between contingent liabilities and provisions are as follows −
| Sr.No | Contingent liabilities | Provisions |
|---|---|---|
| 1 | Recorded at present to account for future possible outflows events. | Accounting for the present, due to past events. |
| 2 | Occurrence is conditional or not certain. | Occurrence is certain. |
| 3 | Reasonable estimation is made for the future amount to be paid. | Amount is not largely certain. |
| 4 | Recorded in Statement of financial position: increase in company’s liabilities. | Recorded in Statement of financial position: decrease in company’s assets. |
| 5 | Not recorded in the income statement. | Recorded in income statements. |
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