Using Provisions 

Provisions are postings to the General Ledger regarding possible future liabilities. Unlike Cost Accruals, Provisions tare for uncertain events. They are a prudent means of ensuring your Accounts system has reserves to deal with unplanned or unexpected future costs. 

Examples of Provisions include:

• Possible Bad Debts.
• Warranty Claims.
• Repairs and Renewals.
• Asset Impairment.
• Severance Payments.
• Tax.
• Depreciation.

Accounting for Provisions

Typically, provisions constitute regular periodic charges against the Income side of your General Ledger. This builds up a set of contingency funds in the Balance Sheet to provide for these unexpected liabilities if they occur. This ensures a smoothing out of the resulting liability charges over several periods instead of incurring a substantial cost in a single period. 

If the "Provided For" event never occurs, write back the contingency reserve at year-end to the cumulative Income/Expense side of the General Ledger along with the corresponding Balance Sheet reserve. Then carry it forward to the next year. 

See:

Managing General Ledger Accounts‍ 

Creating General Ledger Journals‍ 
 

General Ledger Overview (7.0) - AIQ Academy

Add Edit GL Acounts (7.1) - AIQ Academy

GL Journals (7.2) - AIQ Academy

This section deals with specific considerations in designing a COA to handle provisions. For general information on setting up accounts, see Managing General Ledger Accounts.‍ 

Creating Accounts for Provisions

Create the following accounts if not already present in your Chart of Accounts:

• Expense Accounts for each type of Provision you want to account for.
• Corresponding Balance Sheet Accounts (as an Asset) to hold the cumulative reserve funds. The Balance Sheet Accounts should bear a relationship to the type of Provisions you are setting up. 

You can also use a single P&L Charge Account to post to several Balance Sheet Contingency Reserve Fund Accounts. 

Reporting on Provisions

Whether you set up all the forward Postings in advance at the start of the financial year or post the Provisions monthly using the Copy facility, they will automatically be included in your reports. 

For ease of comparison on reports and in the GL Explorer, organise provision accounts to appear next to their related accounts. See Changing a Report layout for more details.

In some cases, you might require a specific provision account in addition to the main one so that they appear separately in the P&L. However, you should assign GL Groups to these accounts to present the total costs under this sub-category. 

For example, you could have an Emergency Repair Provisions account in addition to the regular Repairs & Renewals Cost Account. In the case of potential Warranty Claims you could have a charge account directed to the Cost of Sales Account or set up a separate account called Potential Warranty Claims and then group it with the Cost of Sales P&L Account. 

GL Groups can be added as a column to the General Ledger Accounts listing grid:

For more details on creating GL Journals, see Creating General Ledger Journals.‍ 

Step One: Create the General Ledger Journal

1. Go to GL > Journal Manager > GL Journal.
2. Set up the journals as required. See Creating General Ledger Journals.
3. Click Process.

Step Two: Re-use GL Journals

Set up as many forward postings as you wish. 

1. Go to GL > Journal Manager.
2. Against the relevant journal, select Copy from the Actions dropdown.
3. Change its Date, Reference, and Process the copied Journal. 
4. Repeat for as many forward Postings as you wish. 

See: 

Reusing Journals for Wages and Salaries 

Dealing with a 'Provided For' Cost

If a 'Provided For' cost arises in a particular month, for example, a Bad Debt, you must write it off against the Trade Debtors Control Account:

• Credit this Amount to the Debtors Control Account.
• Debit the corresponding Bad Debts Provision Account (in this case both are Balance Sheet Accounts). 

For Emergency Repairs

Post it to the Supplier Account (the Repairing Company) using the Emergency Repairs Provision Account (Balance Sheet) as the GL Account on the Invoice Line. Remember that the Cost has already been accounted for by way of the monthly charges to the P&L Repairs Account, therefore, this is a reduction of these built-up provided for costs in the reserve fund. 

Dealing with Negative Balances 

If such postings diminish the reserve contingency in the Balance Sheet and result in a negative contingency going forward, you can:

• Leave the position as is, in the expectation that further future transfers from the P & L Charge Account will repair the position.
• Increase future provision charges.
• If it is late in the year, post further charges against as many open periods as are left in the financial year.

Fixed Assets

If you have implemented the Fixed Asset system as part of your Accounts package, then you should use the Depreciation Module instead. See Fixed Asset Depreciation and Impairment.

If you are using the Fixed Asset system to account for Asset Disposals, you need to be aware of any Provisions which may have been set up in the General Ledger to account for such disposals. To avoid double-counting, you need to make the necessary adjustments in this system as well. 

Inventory

If you are using the Inventory Management System for Stock Control, you should be aware that Inventory write-downs may impact similar Provisions in this system.

At financial year-end, you have the option to:

• Write back some Over-Provisions by Journaling the excess back into the charge account spread across as many remaining Open Periods as you wish.
• Do nothing, leave them as they are, and the system will "Roll Over" these amounts to the first period of the New Financial Year.

1. Go to GL > Journal Manager.
2. Open the relevant Journal and click Reverse.