Financial Accounting Workflow:Two Ways To handle Provisioning or Accruals

This article is not regarding the discussion of the adequacy of provision /accruals nor to understand how the FRS handles it.

Specifically,this article is to discuss the way(s)  we book in provision or accrual in our books of accounts.

Generally,there are two (2) ways of accounting treatment:
(1) Partial method and
(2) 100% reversal method
For the Partial Method:

The accounting entry is as follows:
Debit:Expenses (Income Statement)       10,000
Credit:Provision/Accrual                                       10,000

Subsequently,when actual expenses are entered,we  need to do a reversal:

Debit:Provision/Accrual                            9,900
Credit:Bank /Supplier                                             9,900

This will go on leaving some balance –some favourable or adverse depends how good we are at the game of provisioning or accruing.

However,another method is what I called the 100% reversal method:
Originating entry is the same:
Debit:Expenses (Income Statement)       10,000
Credit:Provision/Accrual                                       10,000
When reversal,the difference compared to the first method is to reverse completely the original entry:

Credit:Expenses (Income Statement)        10,000
Debit:Provision/Accrual                                        10,000
The next step is to book in the actual expenses of $9,900
Debit:Expenses (Income Statement)           9,900
Credit:Bank /Supplier                                             9,900
Now,you might wonder why I would like to raise this simple point in this article.
In the past,I have seen and reconciled some of provision /accruals with the partial method.

I found that and especially  if we were to open only one major provision/accrual account and leave it alone for some months,you will see that to  reconcile it  so as to see the adequacy might be quite tedious.

Hence,the suggestion is that as part of the simplifying process in your accounts department,you might want to consider using the 100% reversal methodology.

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