Tag: Accounting Equation

Accounting is the process of recording, classifying, summarizing, and interpreting financial transactions of an organization. It provides a clear view of a company’s financial health through financial statements, helping stakeholders make informed decisions. Key components include assets, liabilities, equity, revenues, and expenses.

• Assets:

Assets are resources owned by a business that have economic value and can provide future benefits. They include tangible items like cash, equipment, and inventory, as well as intangible assets such as patents and trademarks. Assets are classified into current and non-current, based on liquidity.

• Liabilities:

Liabilities are obligations that a company owes to external parties. They arise from past transactions and must be settled in the future, often in the form of cash or services. Liabilities can be short-term (current) or long-term (non-current), such as loans, accounts payable, and bonds.

• Equity:

Equity represents the owners’ claim on the business after all liabilities are deducted from assets. It is also known as net assets or shareholders’ equity and includes capital invested by owners and retained earnings. Equity indicates the value remaining for shareholders if the company is liquidated.

• Revenue:

Revenue, or income, is the money earned by a business from its operating activities, such as the sale of goods or services. It is the top line of the income statement and reflects the total earnings before any expenses are deducted. Revenue is essential for assessing business performance.

• Expenses:

Expenses are the costs incurred by a business in generating revenue. They include rent, wages, utilities, and cost of goods sold (COGS). Expenses reduce a company’s profit and are recorded on the income statement. Proper management of expenses is crucial for profitability.

• Accounts Receivable:

Accounts receivable refers to money owed to a company by its customers for goods or services provided on credit. It is considered a current asset since it is expected to be received within a short period. Timely collection of accounts receivable is important for maintaining cash flow.

• Accounts Payable:

Accounts payable represents amounts a company owes to suppliers for goods or services purchased on credit. It is a current liability and must be paid within a short period. Managing accounts payable efficiently ensures smooth business operations and helps maintain a good relationship with suppliers.

• Depreciation:

Depreciation is the systematic allocation of the cost of a tangible asset over its useful life. It accounts for wear and tear, age, or obsolescence of assets like machinery and buildings. Depreciation helps in accurately reporting the value of assets and aligning costs with revenues.

• Accrual Accounting:

Accrual accounting recognizes financial transactions when they occur, rather than when cash is exchanged. Revenues are recorded when earned, and expenses are recorded when incurred, regardless of payment. This method provides a more accurate picture of a company’s financial position than cash accounting.

• Balance Sheet:

Balance sheet is a financial statement that provides a snapshot of a company’s assets, liabilities, and equity at a specific point in time. It follows the accounting equation (Assets = Liabilities + Equity) and helps assess the financial health and stability of a business.

• Income Statement:

An income statement, also known as a profit and loss statement, shows a company’s financial performance over a specific period. It summarizes revenues, expenses, and profits or losses, helping stakeholders assess the company’s profitability and operational efficiency.

• Cash Flow Statement:

Cash flow statement tracks the inflow and outflow of cash within a business over a specific period. It is divided into operating, investing, and financing activities. The statement helps assess the liquidity and cash management of a company, ensuring it can meet its obligations.

• Journal:

Journal is the first place where financial transactions are recorded in the accounting system. It captures all transactions in chronological order before they are posted to the ledger. Each entry in the journal includes the date, accounts affected, and amounts for debit and credit.

• Ledger:

Ledger is a collection of accounts where journal entries are posted. It organizes transactions by account, making it easier to summarize and prepare financial statements. The general ledger includes all accounts related to assets, liabilities, equity, revenues, and expenses.

• Trial Balance:

Trial balance is a report that lists all the general ledger accounts and their balances at a specific point in time. It checks the mathematical accuracy of the accounting system by ensuring that total debits equal total credits. It is a crucial step in preparing financial statements.

Accounting, while essential for business decision-making and financial management, has several limitations. Understanding these limitations helps stakeholders recognize the boundaries of what accounting can and cannot provide.

1. Historical Nature:

Accounting is largely based on historical data, meaning it records past transactions and events. While this information is valuable for reviewing performance, it offers limited insight into future projections. Businesses require forward-looking data for strategic planning, which accounting alone may not adequately provide. It cannot predict future economic conditions or market trends.

2. Ignores Non-Monetary Aspects:

Accounting focuses on quantifiable financial transactions, excluding non-monetary factors. For instance, the value of a company’s workforce, reputation, or intellectual property may significantly impact its success but is not accounted for in financial statements. This means a company’s overall performance cannot be fully reflected through accounting alone.

3. Subjectivity in Valuation:

Certain aspects of accounting rely on estimates and personal judgments. For example, depreciation methods, provisions for doubtful debts, and inventory valuation all involve subjective assessments. These decisions can affect the reported financial results, leading to potential distortions or inconsistencies between organizations using different accounting policies.

4. Cost Concept:

The cost concept of accounting dictates that assets are recorded based on their original purchase price rather than their current market value. This can lead to outdated valuations over time. For instance, real estate purchased decades ago may have appreciated significantly, yet the accounting records will still show the original cost, thereby not reflecting the true current worth.

5. Influence of Window Dressing:

Accounting practices can sometimes be manipulated to present a more favorable financial position than reality. This is known as “window dressing.” For example, a company might delay recognizing expenses or bring forward revenues to make its financial performance appear stronger in a particular period. This can mislead stakeholders relying on the financial statements.

6. Lack of Precision:

Despite the detailed nature of financial statements, accounting information is not always precise. The use of estimates, assumptions, and rounding can lead to approximations. This lack of absolute precision might affect the reliability of financial reports, particularly when evaluating fine margins or making critical decisions.

7. Does Not Measure Inflation:

Traditional accounting methods do not account for the effects of inflation. In times of high inflation, the purchasing power of money decreases, but financial statements do not reflect this. As a result, profits, assets, and liabilities may be overstated or understated, providing a skewed picture of the company’s true financial standing.

8. Limited in Scope:

Accounting records only monetary transactions. Non-financial factors such as market conditions, competition, employee morale, and customer satisfaction, which are crucial for a business’s success, are ignored. Therefore, the broader perspective of a company’s health and performance is not fully captured by financial accounting alone.

9. Complexity of Standards:

Accounting principles and standards (like GAAP or IFRS) can be complex, and their application varies between countries and industries. Keeping up with changes in regulations can be challenging, especially for smaller businesses. Inconsistent application of standards can result in comparability issues across financial reports from different organizations.

Outsourced accounting is a service which provides a full, accounting department experience for small businesses. An accounting department handles the day-to-day transaction coding, accounts payable, accounts receivable, payroll, management financial reporting and many other services.

Outsourced accounting providers have a full complement of accounting professionals allowing them to offer a small team of accountants at a lower cost to hiring.

Benefits of Outsourced Accounting

Many companies outsource a business process. You may already outsource your payroll process, so you’re familiar with some of the general benefits of outsourcing. Outsourced accounting has similar benefits as well as many others:

Freedom

Work on your business while we handle your accounting through the use of secured cloud-based accounting software; which enables you to have access to your accounting records from anywhere in the world at any time.

Real-Time Information

Your accounting is processed as it comes in. You work with us on what you want to do next. We can work on the same data at the same time, ensuring it is current and up-to-date; which puts actionable and current data at your fingertips.

Eliminate Hiring Costs

It’s expensive to hire, train, and maintain an accounting department. Outsourcing the accounting function eliminates hiring and training costs.

Enhance Business Continuity

Valuable knowledge walks out the door when a key accounting personnel leaves your company. The risk of knowledge loss and enhance business continuity with outsourced accounting.

Security

Your accounting data is stored on secured servers in the cloud protecting against physical data loss, and to enhance business continuity and disaster recovery.

Uses:

Bookkeeping:

Since Accounts Payable & Accounts Receivables are highly manual transactional processes, they are often assigned to entry-level accounting professionals in an in-house model in UK accounting firms. Employee attrition is high in these positions, hence every now & then a new talent must be sourced to fill these roles. This means downtime, which represents its own cost in lost productivity, plus the additional cost of hiring & training new team members to take over the role, all while the already scarce talent market drives the cost of this talent upward. That’s a lot of money & effort dedicated to a routine bookkeeping process.

With an outsourced model, this liability is delegated & will be meticulously handled by outsourcing management. General accounting & financial service workforce for outsourcing industry comprises of qualified accountants who are ACCA(UK) & Chartered Accountancy (India) charter holders who are well versed with IFRS & IAS compliant Accounting practices. They lead teams to ensure uttermost accurate accounting while processing your data.   

Accounts Finalisation:

With the need for timely submission of VAT & Income Tax Returns, it is very pertinent that accounting transactions & bank reconciliations are updated on frequent intervals to avoid missing tight deadlines. Furthermore, if a business operates on high cash inflows & outflows, it becomes very essential that records are accurate & the processing of the same takes place under strict internal controls with proper management. Outsourcing assists you in delegating that authority & responsibility thereby adding another layer of safety with cross verifications to mitigate the risks of fraudulent malpractices.

Timely available reports also enable executives to take accurate decisions for companies with immaculate record keeping. Statement of Equity, cashflow and Financial position can be prepared at ease if outsourced rather than the end minute hustle. Accurate statements aid in availing government benefits, loans and angel investments. They are the benchmarks upon which performance is judged & such meticulous tasks should be entrusted only with experts which the outsourcing industry boasts of. 

Payrolling:

The General Data Protection Regulation Act (GDPR) has introduced new dimensions to legislative compliance bottleneck for UK companies, particularly with regards to their staff payroll data. Major outsourced accounting firms invest heavily to build network infrastructure that is GDPR ready so as to ensure data security. With NIC contributions to be made every month for each worker, it becomes a cumbersome process specially if it involves wage-rate & time-rate computations. The complexities of processing payroll are becoming more & more integral & to ensure that rising fines by HMRC are not implicated, firms in general remain fully up-to-date with legislative changes on IR35, NIC contributions, Pension contributions & Finance Act-20. Hence, ensuring that our services remain compliant with changes in taxation or payroll legislation. Moreover, for a UK Company, the constant iterations in the Furlough Scheme, new payroll regulations & the Tax Code system would require hiring of a payroll specialist or staff members who need extensive training perform such mundane yet meticulous task. Evidently, the cards seem better on the ‘outsourcing’ table for all grounds. 

Tax Compliance:

Qualified Accountants have expertise in SA100, CT600 & SA800 filing & with a proper tax plan tailor-made for every client, their progressive tax savings over time is eminent. Outsourcing industry is in lieu with the MTD system for VAT leaving little to no ground for systematic errors in compliance. Furthermore, outsourcing experts ensure full adherence to the PAYE & the Tax code system. Outsourcing firms tend to go by the rulebook of HMRC guidelines & employees are regularly updated with policy changes. Guidance is often needed in choosing the right VAT schemes & to utilise the maximum deductions available through allowances. The staff at outsourced companies are well acquainted with implications of Finance Act of UK while being extensively trained in the use of softwares such as Xero, Payroll Manager, SAGE, QuickBooks, Spotlight Reporting, IRIS among others. This saves our UK Accounting clients the need of scrounging for skilled staff during busy season or cutting corners. 

Management Accounting:

The complete digitisation of financial & accounting process comes with its own perks. Previously, advisory services such as Cost accounting, Transfer pricing & Performance Measurement were expensive endeavours for companies as these required professional specialisation which came at a hefty consultancy fee. These reports must be undistorted, accurate & unambiguous & they must be customised as per the business operations in line with the goal perspectives. However, creating & analysing these reports is a labour-intensive task & not advisable to be performed by in-house staff to ensure transparency. Opting for advisory services of an outsourcing company to carry out functions such as relevant costing, creating pricing strategies, budgeting, risk analysis & variance analysis for large scale manufacturing units is a low-risk way to innovate your financial process while creating dynamic improvements in business performance and profitability. The desire of efficiency can be fulfilled within the stipulated budgeted expense structure by collaborating with an outsourcing firm. 

Business accounting is the process of recording, analyzing, and interpreting financial transactions and information. It is the way a business keeps track of its operations. Sometimes keeping track of these operations can be difficult, which is where accounting software steps in. Watch this video to see how accounting software can make accounting tasks easy.

Benefits of Investing in Accounting Software

In case you are wondering to know what benefits does accounting software offer to a business, then the following are worth reading as it familiarises you with some of the well-known benefits:

Productivity: The first and foremost benefit of adopting accounting software is an increase in business productivity. As the process is automated, the software collects, analyzes and offers valuable insights that assist businesses in making smarter financial decisions.

Greater Insights: Accounting software tracks all successful transactions and offers insights about business financial health. Manually composing these reports is a daunting task. But with the assistance of accounting software, businesses can predict the financial trends and make informed decisions. Hence, smaller companies can easily compete with larger firms by leveraging automation.

Security: Financial transactions form the core of any business; if they happen to fall in the wrong hands, then everything turns into a tragedy. Many cloud-based accounting applications adopt stringent security measures to keep financial data safe. They employ methods such as document encryption, user authentication, and authorization and offers protection like online-banking institutions. 

Financial Transparency: Automated systems prevent errors in calculations that arise due to human intervention. As a result of miscalculation, businesses have to bear irreparable losses and thereby leading to a crisis. In the case of accounting software, all the calculations are automated and hence accounts for a higher degree of accuracy.

Affordability: The accounting and financial systems automate the financial calculations and minimise the administrative burden.

Accurate Forecasting: One of the prominent benefits of accounting software is that it analyses the financial trends and patterns, thereby giving a view of financial performance. Without the software, it would instead take quite a long time to get a glimpse of financial patterns. The software provides a clear picture of areas that needs more investment and concurrently displays sections/areas that incur large expenses. Hence the software facilitates to implement smarter strategies by careful analysis of the financial trends and patterns.

Essential features of each of the Software Categories.

Billing and Invoice system

• Check writing
• Intimate customers regarding payment dues
• Financial activity documentation
• Prepare documents for authorisation and validation

Payroll Management system

• Calculating employee salaries
• Deposition of salaries
• Production of tax forms & Payslips

Time and Expense Management system

• Expedite billing cycles
• Approve expenses
• Collect payments faster

Enterprise Resource Planning Systems

• Product planning
• Material purchase
• Inventory management and control

Accounting software integration: Increasing productivity

Automating even select areas of the business can assist in streamlining operations, eventually boosting productivity for financial management, better cash flow management, and sound financial health.

Effective automation can cut down on time spent on high-volume bookkeeping tasks, freeing up precious human resources to focus on business building activities, including financial and strategic planning.

In the process, existing software need not become redundant. Accounting software integration by professional experts, can help in optimizing automation while ensuring better utilization of existing resources, including infrastructure and hardware. Automated systems can help businesses optimize cloud computing, in turn helping seamless remote work operations.

Uninterrupted business continuity

Apps and tools in software development can help record, store, organize, and access business data more efficiently. Leveraging professional assistance for automation can make a difference in:

• Accurate needs assessment
• Identifying relevant solutions
• Ensuring effective accounting software integration
• Reliable trouble-shooting and backup support
• Reliable technical help
• Savings on expenses; cost efficiency

IAS 24 Related Party Disclosures requires disclosures about transactions and outstanding balances with an entity’s related parties. The standard defines various classes of entities and people as related parties and sets out the disclosures required in respect of those parties, including the compensation of key management personnel.

Disclosures to be made

• Relationships between parent and subsidiaries should be disclosed irrespective of whether there have been any transactions or not. If the entity’s parent or the ultimate controlling party does not produce consolidated financial statements, then the next senior parent must be named in the consolidated financial statements for public use.
• An entity must report the compensation to the key management personnel in total and each of the categories such as short term employee benefits, post-employment benefits, termination benefits, share-based payment, and other long-term benefits.
• If key management services are obtained from another entity, then only the amounts incurred for the provision of such services shall be disclosed.
• If the entity has transactions with the related party during the financial year, then it shall disclose the nature of such transactions, and also all the details such as amount, outstanding balances including commitments, provision for doubtful debts, and the expense recognised in respect of bad and doubtful debts.
• The above disclosures will be made separately in respect of a parent, subsidiaries, associate, entities with joint control or significant influence over the other entity, joint ventures in which the entity is the venturer, and key management personnel of the entity or parent and other related parties.

In general, any related party transaction should be disclosed that would impact the decision making of the users of a company’s financial statements. This involves the disclosures noted below. Depending on the transactions, it may be acceptable to aggregate some related party information by type of transaction. Also, it may be necessary to disclose the name of a related party, if doing so is required to understand the relationship.

General Disclosures

Disclose all material related party transactions, including the nature of the relationship, the nature of the transactions, the dollar amounts of the transactions, the amounts due to or from related parties and the settlement terms (including tax-related balances), and the method by which any current and deferred tax expense is allocated to the members of a group. Do not include compensation arrangements, expense allowances, or any transactions that are eliminated in the consolidation of financial statements.

Control Relationship Disclosures

Disclose the nature of any control relationship where the company and other entities are under common ownership or management control, and this control could yield results different from what would be the case if the other entities were not under similar control, even if there are no transactions between the businesses.

Receivable Disclosures

Separately disclose any receivables from officers, employees, or affiliated entities.

When disclosing related party information, do not state or imply that the transactions were on an arm’s-length basis, unless you can substantiate the claim.

The financial statements of general insurance companies must be in conformity with the regulations of IRDA, Schedule B.

It has three parts: viz:

(a) Revenue Account;

(b) Profit and Loss Account, and

(c) Balance Sheet.

Revenue Account (Form B-RA):

The Revenue Account of general insurance companies must be prepared in conformity with the regulations of IRDA, Regulations 2002, as per the requirements of Schedule B. It has already been stated above that separate Revenue Account is to be prepared for each individual unit i.e. for Marine, Fire, and Accident.

These individual revenue accounts will highlight the result of operation of each individual unit for a particular accounting period. It also reveals the incomes and expenditures of each individual unit. Like Revenue Account of a life insurance company, Revenue Account is prepared under Mercantile System of Accounting.

Items appearing in Revenue Account:

Premiums:

It has already been stated above that general insurance policies are issued for a short period, say, for a year. As a result, many of them may be unexpired at the end of the year. Therefore, the entire premium so received cannot be treated as an income for the current year only. A portion of that amount should be carried forward to the next year in order to cover the unexpired risks. This is what is known as Reserve for Unexpired Risks.

As per Schedule IIB of the IRDA the Reserve for Unexpired Risks should be provided for out of net premium so received as:

(a) 50% for Fire Insurance business;

(b) 50% for Miscellaneous Insurance business;

(c) 50% for Marine Insurance business other than Marine Hull business, and

(d) 100% for Marine Hull business.

In addition to the above, if any company wants to maintain more than this level, it can do so. The same is known as Additional Reserve.

Claims Incurred (Net):

It is the first item that appears in the expenditure side of the Revenue Account of an insurance company. Claims mean the amount which is payable by the insurer, to the insured for the loss suffered by the latter against which the insurance was made.

Claims can be divided into:

(a) Claims intimated but not yet accepted and paid;

(b) Claims intimated, accepted but not paid;

(c) Claims intimated, accepted and paid; and

(d) Claims rejected. But if there is only ‘Claims intimated’ the same is to be treated like (b). That is why, in order to find out the outstanding claims, claims that have been intimated (whether paid or unpaid) should be considered.

At the end of the year the entry for the purpose will be:

Claims A/c             Dr.

To Claims Intimated Accepted but Not Paid A/c

Claims Intimated but Not Accepted and Not Paid A/c

A reverse entry should be passed at the beginning of the next year for which there will be no effect in Claims Account. But, if any claim is rejected subsequently, the amount is to be transferred to Profit and Loss Account and Claims Account must be credited for the purpose.

Commissions:

Insurance Regulatory and Development Authority Act, 1999, regulates the amount of commission which is payable on policies to the agents.

Operating Expenses:

Operating expenses will come under Schedule 4 of the Act. All revenue expenses other than the commission and claims will appear under this head.

Some of the operating expenses are:

Training Expenses; Rent, Rates and Taxes; Repairs; Printing and Stationery; Legal and Professional Expenses; Advertisement and Publicity, Interest on Bank Charges, etc.

Profit and Loss Account (Form B-Pl):

In order to find out the overall performance or results of the operating of general insurance business Profit and Loss Account of the General Insurance Companies is prepared. It also takes into account the income from investment by way of interest, dividend, Rent Profit/Loss on sale of investments. Provision for Taxations and Provision for Doubtful Debts, if any, should also be provided for.

Similarly, other expenses related to insurance business and bad debts written-off also will be adjusted to this account. However, appropriation section of Profit and Loss Account will contain payment of interim dividend; proposed dividend; transfer to any reserve i.e. appropriation items.

Balance Sheet (Form B-Bs):

The Balance Sheet of a general insurance company as per IRDA format is divided into two parts, viz. Source of Funds and Application of Funds. It is prepared in vertical form.

Sources of Funds:

It consists of:

(i) Share Capital (Schedule 5):

Various classes of Share Capital viz. Authorized Capital, Issued, Subscribed, Called-up and Paid up capital are separately shown.

(ii) Reserves & Surplus- (Schedule 6):

All kinds of reserves will appear under this head, viz. Securities Premium, Balance of Profit and Loss Account, General Reserve, Capital Redemption Reserve, Capital Reserve, etc.

(iii) Borrowings (Schedule 7):

Long term borrowings viz. Bonds, Debentures, Bank Loans, taken from various financial institutes will appear under this head.

Applications of Funds:

It consists of:

(i) Investments — (Schedule 8):

All kinds of investments, whether long-term or short-term, will appear under this schedule.

(ii) Loans— (Schedule 9):

Different kinds of loans clearly specified, viz. (a) Security-wise, Borrower-wise, performance-wise, and maturity-wise classification.

(iii) Fixed Assets (Schedule 10):

All fixed assets viz. Goodwill, Intangibles, Land and Building, Freehold/Leasehold Property, Furniture & Fixture, etc. will appear in this schedule.

(iv) Current Assets:

This section has two parts:

(a) Cash and Bank Balances (Schedule 11):

All cash and bank balances lying at Deposit Account and Current Account, Money-at-call and short notice etc. will appear in the Schedule.

(b) Advances and Other Assets (Schedule 12):

All advances (short-term) and other assets, if any, will appear in this Schedule.

(v) Current Liabilities (Schedule 14):

All current liabilities viz., Agents’ balances, Premium Received in Advance, Sundry Creditors, Claims Outstanding etc.

(vi) Provisions— (Schedule 15):

All kinds of provisions viz., Reserve for Unexpired Risk; Provision for Taxation, Proposed Dividend, Others.

New Format for Financial Statement:

According to Insurance Regulatory and Development Authority (Preparation of Financial Statements and Auditors’ Report of Insurance Companies) Regulations, 2002, every general insurance company must prepare as per Schedule B of the Regulations the following three statements for preparation and presentation of financial statements:

For General Insurance:

Revenue Account— Form B-RA

Profit and Loss Account — Form B-PL

Balance Sheet — Form B-BS

Thus, in short, every general insurance company is required to prepare a Revenue Account (Form B-RA); Profit and Loss Account (Form B-PL) and Balance Sheet (Form B-BS).

(a) Interest Suspense Method:

From the standpoint of conservatism, interest on doubtful loans should be transferred to Interest Suspense Account and, at the same time, when the interest is realized (either in part or whole) the same is credited.

 

(b) Cash Basis Method:

No separate entry is required for Interest on doubtful loans. Since interest on such loans comes under Non-performing Assets, as such, such interest should not be recognized from conservatism point of view cash basis method is the best one.

The entries are:

(c) Accrual Basis Method:

Under this method, the whole amount of interest is to be credited and, at the same time, a provision should also be made for such interest to Bad and Doubtful Debts Account.

The entries under this method are:

Provision

A provision is a decrease in asset value and should be recognized when a present obligation arises due to a past event. The timing as to when the said obligation arises and the amount is often uncertain. Commonly recorded provisions are, provision for bad debts (debts that cannot be recovered due to insolvency of the debtors) and provision for doubtful debts (debts that are unlikely to be collected due to possible disputes with debtors, issues with payments days etc.) where the organization makes an allowance for the inability to collect funds from their debtors due to nonpayment. Provisions are reviewed at the financial year end to recognize the movements from the last financial year’s provision amount and the over provision or under provision will be charged to the income statement. The usual provision amount for a provision will be decided based on company policy.

Basic accounting treatment for recognizing a provision is,

Expense A\C                              Dr

Provision A\C                            Cr

Contingent Liability

For a contingent liability to be recognized there should be a reasonable estimate of a probable future cash outflow based on a future event. For instance, if there is a pending lawsuit against the organization, a possible cash payment may have to be made in the future in case the organization loses the lawsuit. Either winning or losing the lawsuit is not known at present thus the occurrence of the payment is not guaranteed. The recording of the contingent liability depends on the probability of the occurrence of the event that gives rise to such liability. If a reasonable estimate cannot be made regarding the amount, the contingent liability may not be recorded in the financial statements. Basic accounting treatment for recognizing a contingent liability is,

Cash   A\C                                       Dr

Accrued Liability A\C                   Cr

Contingent Liabilities	Provisions
Recorded at present to account for future possible outflows events.	Accounting for the present, due to past events.
Occurrence is conditional or not certain.	Occurrence is certain.
Reasonable estimation is made for the future amount to be paid.	Amount is not largely certain.
Recorded in Statement of financial position: increase in company’s liabilities.	Recorded in Statement of financial position: decrease in company’s assets.
Not recorded in the income statement.	Recorded in income statements.