📘 Accrual vs Provision in Accounting: Simple Explanation with Journal Entries and Real-Life Examples

 

✅ Introduction: Why This Topic Matters

Understanding the difference between accruals and provisions is essential for anyone learning accounting or managing business finances. These two concepts play a major role in accurate financial reporting — and are often misunderstood.

In this blog, we’ll break them down in simple, beginner-friendly language, with:

1. Real world examples

2. Journal entries

3. Table for comparison

4. Practical tips

🔹 What Is an Accrual in Accounting?

Accruals are revenues or expenses that have been earned or incurred but not yet received or paid. It means something has already happened — the service is received, or the product is sold — but the cash hasn’t been exchanged yet.

This is part of the accrual basis of accounting, which focuses on matching income and expenses to the time they occur, not when money changes hands.

🧠 Easy Example: Accrued Salary

Let’s say your employees worked in March, but salaries are paid on the 5th of April. Even though you pay in April, the salary expense belongs to March.

📒 Journal Entry on 31st March:

Salary Expense A/C           Dr    ₹50,000  

   To Salary Payable A/C            ₹50,000  

(Being salary accrued for March)

🧠 Example 2: Accrued Interest Income

You have a fixed deposit that earns ₹3,000 interest quarterly, but you want to record it monthly. You’ve earned ₹1,000 in January even though the bank hasn’t paid it yet.

📒 Journal Entry on 31st January:

Interest Receivable A/C      Dr    ₹1,000  

   To Interest Income A/C            ₹1,000  

(Being interest income accrued for the month)

✅ Common Accrual Examples

Scenario	Type	Journal Entry
Accrued Salary	Expense	Dr Salary Expense / Cr Salary Payable
Accrued Rent	Expense	Dr Rent Expense / Cr Rent Payable
Accrued Revenue	Revenue	Dr Accounts Receivable / Cr Income A/C
Accrued Audit Fees	Expense	Dr Audit Fees Expense / Cr Audit Fees Payable

🔸 What Is a Provision in Accounting?

A provision is a liability recorded to cover probable future expenses or losses. The amount and timing are not certain, but the event is expected based on past experience or estimation.

This is a way to prepare for upcoming risks or costs.

🧠 Easy Example: Provision for Bad Debts

Out of ₹1,00,000 in receivables, you estimate ₹5,000 might not be recovered based on past data. You create a provision to reflect this expected loss.

📒 Journal Entry:

Bad Debts Expense A/C           Dr    ₹5,000  

   To Provision for Bad Debts A/C       ₹5,000  

(Being provision created for doubtful debts)

🧠 Example 2: Provision for Income Tax

Your business earned ₹10,00,000 this year. You estimate 25% will go to income tax. Though you haven’t received the tax demand yet, you create a provision.

📒 Journal Entry:

Income Tax Expense A/C         Dr    ₹2,50,000  

   To Provision for Tax A/C            ₹2,50,000  

(Being provision made for estimated tax liability)

✅ Common Provision Examples

Type of Provision	Journal Entry
Provision for Bad Debts	Dr Bad Debts Expense / Cr Provision for Bad Debts
Provision for Income Tax	Dr Tax Expense / Cr Provision for Tax
Provision for Warranty Claims	Dr Warranty Expense / Cr Provision for Warranty
Provision for Legal Disputes	Dr Legal Expense / Cr Provision for Legal Claims

🔄 Key Differences Between Accrual and Provision

Basis	Accrual	Provision
Meaning	Income or expense incurred but not settled	Estimated future expense/liability
Certainty	High – event has occurred	Uncertain – only expected to occur
Timing	Past or present	Future
Example	Accrued salary, accrued rent	Provision for tax, bad debts, warranties
Entry Type	Typically clear and routine	Based on estimation or judgment
Financial Statement Impact	Direct effect on P&L and balance sheet	Affects liabilities and reduces profits

📌 Pro Tip: Why Are These Important?

Both accruals and provisions follow the matching principle in accounting. They help show a true and fair view of profits by ensuring that all expenses are reported in the period they actually belong to — even if cash isn't involved yet.

This improves the accuracy of your financial reporting and helps avoid surprises later.

📋 Summary

Concept	Accrual	Provision
Focus	Recording known but unpaid items	Preparing for possible future costs
Based On	Actual event	Estimation or probability
Journal	Accrued salaries, interest, rent	Bad debts, taxes, legal issues

✅ Conclusion

Now that you’ve understood both accruals and provisions with real-life examples and journal entries, you can confidently apply these concepts in your accounting work or explain them to others. These aren’t just textbook terms — they’re essential tools for proper financial management.