The effect of the accounting treatment of provisions on the income statement

In principle, we must know an important point that allocations are specific to liabilities, whether they are related to short-term or long-term liabilities, but reaching them with a special criterion called the decline in the value of assets. Governmental and the company have a great estimate that it will bear the fine. The value of the commitment was estimated at 300 thousand pounds and decided to create an allowance, the first thing we will do, which is to prove the formation of the provision 0n the income statement.

How to prove custom composition

H expense disputed issues    300000

To

300000h custom disputed cases

At the end of the fiscal period, I want to see the effect of the accounting treatment in the formation of the allowance, what will it be?

The expense for disputed cases will go to the income statement like any expense, and it will be after the operating profit number As for the budget, the allocations balance, the budget is included in the liabilities item, and if it is to be settled within a year, a short-term commitment must be made, and if it is to be settled within more than a year, then it is a long-term commitment, then we go to the cash flow statement

First case from the cash flow list

In principle, we know that the list of cash flows is based on the cash basis and therefore it recognizes any cash income or expense only in the case here the expense is not cash

Consequently, when we make the list of cash flows and start with the net profit before tax, we will add to it the expenses related to the provisions because they were deducted from the net profit before tax in the income statement. If in the next financial period, we will assume that the case ended and the company lost the case and the amount was 350,000

Ok, we did budgetary provision of 300,000

And the issue is lost, and we paid 350,000

If the accounting entry

H custom disputed issues 300000

The accounting entry

H custom disputed cases 300000

H money for disputed cases 50000

                       To

H Creditors (Governmental Authority)) 350000

And when we pay the Governmental Authority

H Creditors 350000

       H bank or payment notes 350000

The effect of using the provision on the financial statements

To see the effect of using the allowance on the financial statements first, I was the component of the provision for the previous fiscal period with 300,000 thousand, and we saw its effect on the financial statements, if the 300,000 were recognized in the previous period in the income statement as an expense.

This period will be defined as only 50,000 expenses in the income statement, so for the balance of allocations in the financial center it will be zero, why because I had a commitment of 300,000 in the previous period and they were paid during the current period and therefore the balance remained zero

The second case of the cash flow statement

The period until late when the provision was formed in the non-cash expense of the provision was settled and added to the net profit before tax because it was a non-cash expense, in the current period the company paid the value of this provision

In addition to the 50,000.

Consequently, the 300,000 countries will be an external cash flow within the operational activities, and its name will be in the financial statements (used from the provisions), so the 50,000 countries will actually have deducted from the net profit before tax in the current fiscal period, and therefore there is no settlement on the net profit before tax.

The third case from the list of financial flows

It is the case of reimbursement of the allowance or part of the allowance, assuming that in another case the company has judged it, for example, with 250,000, so the company was creating an allowance of 300,000 thousand

Firstly

We will return part of the provision for the expiration of its purpose

It remains the first accounting entry

50,000 h custom disputed cases

          To

 50,000 H refund of disputed cases (revenue)

And the second accounting constraint

250,000 h custom disputed cases

  250,000 h Creditors the governmental body

And when we pay to the government agency

250,000 h Creditors the governmental body

   250,000 H banknotes payable

The importance of the impact of the accounting treatment

Returning part of the allowance for the absence of the purpose We said that he wanted to go to the income statement and to provide the net profit before tax in the income statement and therefore when I make the cash flows, the net profit before tax is deducted because it is non-cash revenue, and the actual part I used from the provision is the 250,000

Since they consider an external cash flow to be deducted from the items of the operating cash flow statement in relation to the budget, the balance of the provision will remain zero because I had 300 thousand; I responded 50 thousand and used the 250,000 thousand.

NB

The part used from the allowance does not affect the income statement because when it is formed it affects only it, the income list remains in it, an expense remains when the allowance is made, and there remains revenue for what is returned the allowance or part of it.

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