Every now and then there are situations which may but may also not result in expenses for the company. It\u2019s called uncertainty and something to measure it is called probability. <\/p>\n
In a situation where it\u2019s unsure whether you have to pay anything or not, it\u2019s really difficult to recognize the balance in the accounts as such. In a situation where it\u2019s probable the amount is due, you recognize a provision in the accounts. However, if you believe it\u2019s more unlikely than likely (i.e. the probability is less than 50%), you do not recognize the amount in the accounts. So, as you might have guessed, your first course of action is do assess the probability – it\u2019s all an estimation so there really isn\u2019t a right or wrong answer. What the management estimates, is their decision. Just make sure it\u2019s based on reasonable assumptions and accurate information.
\n
\nIf the result reached is that it\u2019s to be recognized in the accounts, you debit for expense and credit the liability. Now, if you determine however that it\u2019s less likely that you would have to pay something, it\u2019s a contingent liability and it\u2019s not recognized in the accounts. If you assess the probability to be let\u2019s say 20%, you do not account for that 20% of the expense. You don\u2019t account for anything. <\/p>\n
Something to watch out for though is the disclosure in the annual report. If you do account for a provision, it\u2019s to be expected that you also explain further in the notes what the balance is about. If a conclusion is reached that the liability is less then likely to be paid, you should still disclose the information about the possible payable, even though you do not account for the liability and expense itself in the accounts. <\/p>\n","protected":false},"excerpt":{"rendered":"
Every now and then there are situations which may but may also not result in expenses for the company. It\u2019s called uncertainty and something to measure it is called probability. In a situation where it\u2019s unsure whether you have to pay anything or not, it\u2019s really difficult to recognize the balance in the accounts as […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[25,38],"tags":[],"class_list":["post-2831","post","type-post","status-publish","format-standard","hentry","category-1-basic-accounting","category-1-10-accruals"],"aioseo_notices":[],"_links":{"self":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2831","targetHints":{"allow":["GET"]}}],"collection":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/comments?post=2831"}],"version-history":[{"count":2,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2831\/revisions"}],"predecessor-version":[{"id":2856,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/posts\/2831\/revisions\/2856"}],"wp:attachment":[{"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/media?parent=2831"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/categories?post=2831"},{"taxonomy":"post_tag","embeddable":true,"href":"http:\/\/www.officetodo.com\/public\/wp-json\/wp\/v2\/tags?post=2831"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}