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Provisions

Forums › ACCA Forums › ACCA FA Financial Accounting Forums › Provisions

  • This topic has 3 replies, 2 voices, and was last updated 10 months ago by mrjonbain.
Viewing 4 posts - 1 through 4 (of 4 total)
  • Author
    Posts
  • March 26, 2022 at 8:31 pm #651962
    jcwwheeler
    Participant
    • Topics: 1
    • Replies: 3
    • ☆

    Hello all,

    A quick question –

    Once a business has recognised at period end the need to create a provision for warranty repairs for example –

    I.e :

    DR Warranty Expense
    CR Provision

    It is my current understanding that this provision will then carry forward to the next accounting period on the balance sheet based on an estimate of what the next years warranty repairs expense will be.

    Is the provision account then adjusted throughout the current year when an actual warranty expense occurs during the year ie materials for repairs?

    For example –

    DR Provision
    CR Bank (or payables).

    Thanks,
    Jack

    March 27, 2022 at 3:59 pm #652038
    mrjonbain
    Moderator
    • Topics: 1
    • Replies: 1576
    • ☆☆☆☆☆

    You are basing provision on expected costs in future based on this year’s sales. So in future year you would have Cr Bank Dr warranty expense (p+l current year). However, since this relates to goods sold in previous years, for which provision has been made another entry of Dr provision (relating to warranty expense) Cr P+ L should be made. Hope this helps.

    March 29, 2022 at 2:56 pm #652231
    jcwwheeler
    Participant
    • Topics: 1
    • Replies: 3
    • ☆

    I see.

    Thank you for your help I completely understand.

    What would be the need though for an adjusting entry?

    Why could you not just CR Bank and DR provisions straight away if you know that warranty expense relates to sales from the previous period?

    Thanks.

    March 31, 2022 at 2:27 pm #652423
    mrjonbain
    Moderator
    • Topics: 1
    • Replies: 1576
    • ☆☆☆☆☆

    It is probably a similar reason as why you can’t just give balancing figure for someone that is both a creditor and debtor of a company. The warranty expense is a current expense even though related to previous years transactions. Easier to see with provision for decommissioning or potential legal judgement against company. Hope this helps.

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