I am making use of provision accounts for accounts to be paid for example annually.
Examples thereof is Insurance, Accounting fees, Tax.
This is calculated by the actual annual expense divided by 12 months = monthly provision.
Would it be Ok if I do the following?
Create the provision account under “Liabilities” in order to reflect in the balance sheet and not
the Income Statement. The reason for that is that the amount should be reflecting in an account
as a cost, but it should not be reducing the profit.
Monthly make a payment from the Bank Account to the Provision Account.
At the end of the term when the account must be expensed, receive the amount back into the
Bank Account and make a payment to the expense account.
What you call provision accounts are not necessary at all if you are doing cash basis accounting. However, if you are doing accrual basis accounting, they may be. Often,these are called “accrued expenses” because from an accrual standpoint they have been been incurred but not yet paid. See What are accrued expenses and when are they recorded? | AccountingCoach for an explanation.
However, they may very well be reflected on the income statement, not just the balance sheet. And if it is reflected as a cost (expense), it will certainly affect profit. This goes to the heart of accrual accounting.
Moving things in and out of the bank account is incorrect, because you have not actually made or received payments. The proper way to handle the situation is with adjusting entries. See the discussion that begins at Adjusting Entries | Explanation | AccountingCoach for more information. If you still don’t understand, I recommend discussing this with an accountant. It really has little to do with Manager’s functionality.
These Accounts would be for accrual accounts to be expensed at a certain period.
The intention is to only be reflected on the Income Statement by the time it is expensed.
Would that be correct?
I will read the link, because I need to know which accounts should be credited and/or debited and credited.
No. The manner in which you use the word “expensed” suggests you actually mean “paid.” If you are doing accrual accounting, items are expensed when incurred, used, or obligated, NOT when paid. And if you are doing cash accounting, you should not use accrual or provision accounts at all. Accrual accounts should be used in situations where needed to accurately reflect the position and performance of the company.
For example, if loan interest is accrued monthly according to the terms of a loan, but the actual payment is not made until some time in the future, your income statement should show only the accrued interest expense. In the future, when the principle and interest are all paid, it would be incorrect to show the entire expense as having occurred at the end.
The accounts to be used will be ones of your own creation and should match the categorization of the expenses. But these are not commonly needed. Insurance is frequently a good example, because premiums are paid in advance and may cover multiple accounting periods. But accounting fees are probably not good examples, because the service has not been rendered, and once it is the invoice usually comes quickly.
In general, if you have invoices from suppliers for goods or services rendered in the past or during the current accounting period (such a monthly, pre-paid phone bill), accrual accounts are not necessary. They are more useful in situations where large payments are made in advance, or where obligations are being created as time goes by. Annual insurance premiums and taxes which are owed but not paid until a return is filed are examples.
You are correct with your statement, but I intend use the provisions as a saving (If my Accounting Fees would be R 12,000.00 at the end of November).
I then want to save R 1,000.00 per month in order to have the R 12,000.00 available at the end of November to ensure I have sufficient funds to pay it…
Just create an asset account and make advances into it by credit cash and debit it (It becomes like a reserve).
When you it time to expense, debit the expense account and credit the asset account to retire it. Provisions involve the income statement, what on your mind is an advance.
This is, in fact, the purpose of accrual or provision accounts. But you suggested actually making payments from a bank account into the accrual account. That would be incorrect accounting practice because (a) you would not be able to reconcile with bank statements and (b) no actual money would be leaving the business, inviting questions of fraud if you are ever audited. The only time you should involve bank accounts is if you actually create a real bank account to save the money for the upcoming charge.
If I understand what @Abeiku is saying, he suggests a “phantom” cash account. (I am assuming he means cash on hand and not cash at bank.) To my mind, that also raises problems. First, an audit of the cash fund or till will be inaccurate. Second, it does not guarantee you will actually have the money when the bill comes due. These problems are related to the fact that he suggests using an asset account.
Accrual accounts are really liabilities. So the appropriate entry involves debiting the correct expense account (say, for example, for the monthly portion of loan interest) and crediting the corresponding liability account (such as accrued interest). They would be cleared when payment is made by crediting debiting the accrual account and crediting a cash or bank account.
I am concerned, though, that you keep returning to the accounting fee example. I understand that you want to be sure money will be available for a planned expenditure. But under accrual accounting, knowing that the expense will be incurred is not a reason to record it. If, as I suspect, you have a predictable expense once a year, you surely want to plan for it. But it is not considered an expense of your business until the services are provided and you receive the invoice. When @lubos introduces the promised ability to create custom control accounts and subaccounts, you will easily be able to segregate money within a bank account for such purposes. But for now, if you really want to be sure money will be available AND keep your books correctly, perhaps a separate, actual bank account is needed. It is simply a fact of life that accounting is about recording what has happened, not what will happen.
Would there be anything wrong with the following method?
Create a liability such as provisions
Dt the expense account (Advertisin) with an amount
Ct the Provision Account in Liabilities.
This will not change the bank account, but a figure has moved to a saving. (The bank will still reconcile correctly)
The balance sheet will reflect that there is money saved for this expense and the P/L statement Profit/Loss will not be affected.
When eventually you have to pay this expense, simply go to bank, spend money and select the Provision account in Liabilites.
This sounds correct, but you might want to verify this with your accountant. I have personally never used accrual accounts, so I might not be thinking everything all the way through correctly.