Difference between provision and actual expenses
We make some provisions and accruals each year in our financial statements.
However, the actual expenses incurred are almost always different from the accrual or a provision made. How should we book the difference between actual expenses and a provision?
Should we restate the financial statements for the previous period?
At the end of the reporting period you should measure a provision as the best estimate of the expenditure to settle the obligation. So, by definition, the provision is a sort of an accounting estimate.
If you applied the standard IAS 37 correctly in measuring your provision and the actual provision turns out to be different for various reasons, then you do NOT restate the financial statements for the previous period.
The reason is that you are NOT correcting any error. Instead, your accounting estimate proved to be different.
Any difference between the amount of the provision and the final settlement amount is recognized in profit or loss in the period when the settlement happens and you use the provision.
As for the presentation, you should present the difference between the provision and the actual expense in the same line as the expense for the original provision.
The same rules apply for accruals.
Please see IAS 37.36.
ABC recognized a provision for warranty repairs related to sales made in 20X1 at CU 100. The related journal entry was:
Debit Profit or loss – Expenses for warranty repairs: CU 100
Credit Provision for warranty repairs: CU 100
In 20X2, the expenses for warranty repairs related to sales in 20X1 amounted to CU 120. ABC makes the following journal entry:
Debit Provision for warranty repairs: CU 100
Debit Profit or loss – Expenses for warranty repairs: CU 20
Credit Trade payables: CU 120
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What will be the journal entry if the actual expense is lower than provision?