Provision v Allowance

Australia Discussion in 'General Accountancy Discussion' started by NoNumbers, Jul 11, 2018.

  1. NoNumbers

    NoNumbers

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    Hi Guys, am studying Accounting at Uni and was pointed out by my lecturer that there is a technical difference between the terms Provision and Allowance (i.e. for bad & doubtful debts) but never clarified, noting, we'd be covering this next term. So no explanation was provided. Hence, I'm here now asking the question. Just wondering if someone might shed some light for me. Kind thanks.
     
    NoNumbers, Jul 11, 2018
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  2. NoNumbers

    Steve-LevelUp VIP Member

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    I'm not specifically aware of an official distinction, however, I view a provision as an amount allocated for a specific financial exposure. Eg, a warranty provision, a lawsuit provision, etc. These are for potential costs where the expectation of payment is unknown.

    An allowance (as in for bad debts) is to pre-emptively estimate how much bad debt you will have. Instead of incurring bad debts as they are incurred, you have an allowance, which records a portion to bad debt every month at the time the revenue was earned (matching).

    Not sure if this is correct, but this is my interpretation.
     
    Steve-LevelUp, Jul 11, 2018
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  3. NoNumbers

    bklynboy VIP Member

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    Provision is associated with a future liability whereas an allowance is a contra asset. For example, you may make a provision for a lawsuit and that would show up as a liability. An allowance is taken against an asset such as reducing a receivable for potential bad debt and reduces an asset. Therefore they are reported differently on a balance sheet.
     
    bklynboy, Jul 11, 2018
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  4. NoNumbers

    NoNumbers

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    Guys, thanks for those answers. That makes sense now. Cheers.
     
    NoNumbers, Jul 11, 2018
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