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.

Advance Topic: ind as 115 revenue recognition

 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.