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I have some confusions regarding Provision.
we record the provision in estimated amount as:
Dr expenses xxx
Cr provision xxx
1) Now if we are making a provision then we recognise it in the year it was made. Also, we recognise the expense amount in SOPL in same year?
2) If a provision was made at 31 dec 20X0 for $64000, but only $25000 of it was utilised during the year ended 31 dec 20X1. Now how will this utilised amount be recorded in financial statements and what about the remaining amount?
3) If the provision required for the following year is 57500, then the remaining amount ($39000) will be transferred here,right? and an increase of provision is required for 18500. According to an answer in BPP kit, this 18500 is the amount recognised in SOPL for the year
I didn’t get it.The double entry is to debit the irrecoverable and doubtful debts expense account and credit the allowance for receivables account, with the increase in the allowance.
The allowance (we do not call it provision) appears in the SOFP as a reduction in receivables – it is not a question of recognising it.
2) I do not know what you mean by ‘utilising’ the provision. If you mean that it is used to write off any specifically irrecoverable debts, then the best entry (as I explain in my lectures) is to Credit Receivables and Debit irrecoverable debts expense account (as always) and then to adjust the provision to the balance needed at the end of the year with the double entry being to the irrecoverable debts expense account. The provision at the end of the year appears on the SOFP as a reduction in receivables.
3) The remaining balance is $39,000 is increased to the balance required of $57,500 by crediting the provision with $18,500 and debiting the irrecoverable debts expense account with $18,500 which is the cost of increasing the provision. The expense of $18,500 appears in the SOPL as with all expense.
All of this is explained in detail, with examples, in my free lectures on irrecoverable debts and allowances.
The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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