Year-end · Level: Exam specials
Journal entry: Making a provision
An obligation is likely but uncertain in amount or timing, such as legal costs. The expense is booked this year against Provisions.
Worked example
For a pending lawsuit we expect legal costs of £3,500.00. Book the year-end entry.
Correct journal entry
Legal and professional fees £3,500.00 / Provisions £3,500.00
Debit
Legal and professional fees£3,500.00
Credit
Provisions£3,500.00
Why?
- Legal and professional fees: expense incurred → debit
- Provisions: liability increases → credit
Calculation
- The amount is uncertain but the expense belongs to this year: a provision.
Typical mistake
Booking a provision as a trade payable.
Your turn
Three problems on exactly this case, with different numbers. Amounts work with or without separators, e.g. 2,400.00 or 2400.
Transaction
For a pending lawsuit we expect legal costs of £8,500.00. Book the year-end entry.
Debit
Assets up · expenses · liabilities down
Total debit£0.00
Credit
Liabilities up · income · assets down
Total credit£0.00
Frequently asked questions
What is the journal entry for making a provision?
Example: Legal and professional fees £3,500.00 / Provisions £3,500.00.
How do I recognise this case?
An obligation is likely but uncertain in amount or timing, such as legal costs. The expense is booked this year against Provisions.
What is the typical mistake?
Booking a provision as a trade payable.