For the purpsoe of writing journal entries, we classify the accounting itmes into three categories, Real, Personal and Nominal Accounts.
If we create Provisions like 'provisions for doubtful debt' or 'provisions for taxation', under what category, do we classify the provisions (whether real, personal or nominal).
thanks in advance
Dear Srikanth
The use of the word "provisions" will affect which category on the balance sheet that you would classify the provisions of _ _ _ _ _ account. Provisions for doubtful accounts is a contra-asset account attached to the asset account that is a collectible loan such as accounts receivable or bank loans. Whereas provisions for taxation suggests it may be an asset or liability. The categorization is addressed in FASB 109 (USA):
"The following basic principles are applied in accounting for income taxes at the date of the financial statements: A current tax liability or asset is recognized for the estimated taxes payable or refundable on tax returns for the current year. A deferred tax liability or asset is recognized for the estimated future tax effects attributable to temporary differences and carryforwards. The measurement of current and deferred tax liabilities and assets is based on provisions of the enacted tax law; the effects of future changes in tax laws or rates are not anticipated. The measurement of deferred tax assets is reduced, if necessary, by the amount of any tax benefits that, based on available evidence, are not expected to be realized."
Dear,
Thanks for sharing.
I agree with Raymond's contribution.
all the best!
A provision is an account that is used to record an entity's liability which exists at that time. Such recording should be matched with a relevant expense account.
As regards taxes, the difference between the entity's records and tax authority's calculation of tax expense (due to different rates used by each) results in either deferred tax liability (DTL) or deferred tax asset (DTA). Such DTL or DTA are usually reconciled in the following periods.
If you want to match 'provisions for doubtful debt' or 'provisions for taxation' to your three categories real, personal and nominal accounts I would recommend the following: 'provisions for doubtful debt' is an impairment of accounts receivable valued at nominal amount, thus ist should be matched to "nominal accounts". Provisions for taxation should be matched to real as they are tax liabilities.
The term provision is usually a liability under International Accounting Standards. There is a specific accounting standard which is IAS 37 - Provisions, Contingency Assets and Liabilities. The provisions are IAS 37 deals with probable future expenses of unknown amounts and timing arising out of legal or moral obligations (those which the reporting entity has disclosed in the financial statements). These could be clean up costs, redundancy payments etc. The treatment of these transactions is Debit (Dr): Expenses A/C - Provision Credit (Cr): Payable A/C. The accounts involved here are Nominal Accounts.
Provision for Bad Debts is usually determined by Prudence Concept which IASB has recently noted its importance having downgraded it. It encourages preparers of financial statements to avoid overstating assets and income but also avoid understating expenses and liabilities. An entity must make a provision for bad debts once certain conditions have been made according to entity's credit policy or industry norms. Central Banks usually issue directives for financial institutions on how to deal with provisions on toxic loans. Provisions in this regard are categorized as specific and general provisions. Nominal Account is the Provisions A/C while specific borrowers are personal accounts.
provisions for doubtful debt' or 'provisions for taxation' is neither a real nor personal account, so it should be classified under the Nominal Accounts category.
Provisions are usually used for assuring financial statement users for their reliability. Also they are reported as contra-accounts.
- Badges
- Science topic
- Similar topics
- Books