Learn Provision Journal Entry With Example

 Hello Readers 

                     Today we are going to solve the provision for expenses journal entry-related example so if you are an accounting student then you can check out this example and learn the basics of provision in accounting.

 Provision Entry in Accounting

This entry is used to recognize an estimated expense in the financial statements of a business. This Provision Entry is used when liability will be incurred in the future, but the exact amount or timing of the expense is uncertain. 

To Record the Provision: 

• Debit: Expense Account( for example : Provision for Bad Debts)

• Credit:- Provision Account (for example Warranty Provision) 

Now let's solve our example:

Provision For Expenses Journal Entry With Example

Let's solve the example for Provision for Bad Debts:

 

Suppose a business, YAZA Electronics, sells electronic goods on credit to its customers. YAZA Electronics estimates that a certain percentage of its accounts receivable will become uncollectible due to customers not paying their debts. To account for this, they create a provision for bad debts.

 

Journal Entry For Provision For Expenses

Step 1:- Record the Provision for Bad Debts For the company:

• Debit: Bad Debt Expense 5,000

• Credit: Provision for Bad Debts 5,000

Explanation: 

YAZA Electronics estimates that 5,000 of its accounts receivable will be uncollectible, so they create a provision for bad debts by debiting the Bad Debt Expense account and crediting the Provision for Bad Debts account.

Now take a look at the balance sheet before and after the provision:

• Balance Sheet Before Provision : 

YAZA Electronics

Balance Sheet

As of [Date]

• Assets:

- Cash: 20,000

- Accounts Receivable (Total): 50,000

- Inventory: 30,000

• Total Assets: 100,000

• Liabilities:

- Accounts Payable: 15,000

- Loan Payable: 20,000

Total Liabilities: 35,000

• Owner's Equity:

- Capital: 65,000

Total Liabilities and Equity: 100,000

• Balance Sheet After Provision

YAZA Electronics

Balance Sheet

As of [Date]

• Assets:

- Cash: 20,000

- Accounts Receivable (Net of Provision): 45,000 [50,000 - 5,000]

- Inventory: 30,000

Total Assets: 95,000

• Liabilities:

- Accounts Payable: 15,000

- Loan Payable: 20,000

Total Liabilities: 35,000

• Owner's Equity:

- Capital: 60,000 [65,000 - 5,000]

• Total Liabilities and Equity: 95,000

Conclusion

In this post, we add a provision for expenses journal entry with an example and provision journal entry so that all the students can learn how to use provision for expenses journal entry in Accounting.