Introduction

When to Use Provisions 

Provisions are postings to the General Ledger regarding possible future liabilities. They differ from Cost Accruals as with Provisions you do not know whether you will have to deal with this particular future liability. They are a prudent way of ensuring that your Accounts system has set aside some financial reserves to deal with unplanned or unexpected future costs. 

Some 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 many periods instead of incurring a substantial cost in a single period. 

If the "Provided For" event never occurs:

1. 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.
2. 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

Designing a COA for Provisions

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 

If not already present in your Chart of Accounts, you need to create:

• 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.

It is important that the Balance Sheet Account bears some relation to the type of Provision you are setting up. 

See:

Managing General Ledger Accounts‍ 

Using a single P&L Charge Account and multiple Provision Accounts

You can also use a single P&L Charge Account to post to several Balance Sheet Contingency Reserve Fund Accounts. The example below shows Depreciation Postings using a single P&L Charge to post to multiple Cumulative Depreciation Balance Sheet Accounts:

When 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 Financial Reports.

Making Accounts appear adjacent in Reports

In this example regarding Bad Debt, if it becomes a reality, the result will be a write-off in the Trade Debtors Control Account. Therefore, the Bad Debt Provision Account (6100 Provision For Bad Debts) is adjacent to the Trade Debtors Control Account (6100 Trade Debtors Control) in the Chart of Accounts.

In the GL Explorer, when reporting on the Balance Sheet, these two Accounts are adjacent for ease of comparison:

Likewise, a Provisions regarding Computer Equipment Depreciation would be next to the asset "Computer Equipment Purchased" in the Balance Sheet. 

Using GL Groups for Reporting Purposes

In some cases, you might want to set up a specific account for a provision despite having a main account dedicated to the category. For example, you could set up an Emergency Repair Provisions account in addition to the regular Repairs & Renewals Cost Account so that they appear separately in the P&L. However, you should group these accounts for reporting purposes to present the total costs under this sub-category. 
 

In the case of potential Warranty Claims you could set up the charge account directed to the Cost of Sales Account. Alternatively, set up a separate account called Potential Warranty Claims, and then group it with the Cost of Sales P&L Account. 
 

Creating GL Journals for Provisions

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

Setting up the General Ledger Journals

1. Go to General > GL Journal Manager.
2. Select GL Journal from the dropdown to open the General Ledger Journal Entry screen.
   
   

3. Info: Our New Look

   If you are using our new look navigation, the Journal Manager can be found in the GL tab in the new sidebar. Hover over the plus icon to select GL Journals:

   
   

   

   Click to Zoom

   
   

4. Set up the journals as required.
5. Click Process.
   
   

Copying GL Journals to re-use them

You can also set up as many forward Postings as you wish and re-use them. 

1. Go to General > 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 

Managing 'Provided For' Costs

When a 'Provided For' Cost arises

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). 

When the 'Provided For' Cost is for Emergency Repairs

Post it to the Supplier's 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. 

When the 'Provided For' Cost results in a negative balance

Such Postings diminish the reserve contingency in the Balance Sheet and might 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.

Managing Provisions for Fixed Assets or Inventory 

Fixed Assets

If you have implemented the Fixed Asset system as part of your Accounts package, then you should use the Depreciation Module rather than follow the steps outlined here.
 

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.

Managing Provisions at Year End

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.

Cancelling Provisions

To Cancel a Provision or series of forward Provisions:

1. Go to General > GL Journal Manager and find the Provision in the Journal Grid.
   
   
2. Delete

   Info: Our New Look

   If you are using our new look navigation, the Journal Manager can be found in the GL tab in the new sidebar:
   

   
   

3. Open the relevant Journal and click Reverse.