Year-end · Level: Exam specials
Journal entry: Using and releasing a provision
If the costs are lower than provided for, the provision is cleared in full: the actual amount is paid and the rest is income.
Worked example
A provision of £9,000.00 was made for a lawsuit. In the new year the case ends and we pay only £6,700.00 in court fees by bank transfer.
Correct journal entry
Provisions £9,000.00 / Bank £6,700.00, Provisions released £2,300.00
Debit
Provisions£9,000.00
Credit
Bank£6,700.00
Provisions released£2,300.00
Why?
- Provisions: liability decreases → debit
- Bank: asset decreases → credit
- Provisions released: income earned → credit
Calculation
- Not used: £9,000.00 − £6,700.00 = £2,300.00 → income
Typical mistake
Clearing only the amount paid and leaving the rest of the provision.
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
A provision of £8,000.00 was made for a lawsuit. In the new year the case ends and we pay only £7,200.00 in court fees by bank transfer.
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 using and releasing a provision?
Example: Provisions £9,000.00 / Bank £6,700.00, Provisions released £2,300.00.
How do I recognise this case?
If the costs are lower than provided for, the provision is cleared in full: the actual amount is paid and the rest is income.
What is the typical mistake?
Clearing only the amount paid and leaving the rest of the provision.