04-21-2008, 07:07 PM
Dear Checkmated,
I think yor B.Com teacher is having lose grip on IAS-37(Provisions, Contingent Liabilities & Contingent Assets).
IAS-37 defines Provision as "A Liability Of Uncertain Timing or Amount".Any thing that fullfills this definition will be qualified as Provision.
Prior to the Enactment of IAS-37 the word "Provision" was used very loosely in financial reporting because of this reason the word "Provision for Depreciation" and "Provision for Doubtful Debts" are considered to be "Provisions", but IAS-37 clarified certain mis-conceptions about the term "Provision".
Provision For Depreciation And Provision For Doubtful Debts are not "PROVISIONS" according to IAS-37, They are only <b>"CONTRA ACCOUNTS"</b> or <b>"Adjustments"</b> to the carrying value of the assets that is why the balances of Provision for Depreciation and Doubtful Debts accounts are having credit balances.
For Example An Entity has an asset with Carrying Value of $10,000 its useful life is 10 years, it charges Depreciation on Straight Line Basis.
The Depreciation will be $1,000/annum
Respective entry will be.
<b>
DRDepreciation=============>$1,000
===>CRProvision For Depreciation===>$1,000
</b>
At the end of the Financial Year the balance of $1,000 in <b>Depreciation account</b> will be transferred to <b>Profit and Loss</b>.
The respective Entry will be,
<b>
DRProfit & Loss A/C======>$1,000
CR====>Depreciation A/C========>$1,000
</b>
And The Balance in <b>"Provision For Depreciation Account"</b> will be used to <b>net off the Asset</b> for example $10,000(Non-Current Assets Account) <b>LESS</b> $1,000(Provision For Depreciation Account)<b> EQUALS</b> $9,000(Net Book Value Of Non-Current Assets).
The conclusion is that the Provision account is just used to adjust the carrying amount the Asset and hence it is not the Provision that is a liability of uncertain timing or amount as defined by IAS-37.
I hope this helps you.
Regards,
Muhammad Amir
I think yor B.Com teacher is having lose grip on IAS-37(Provisions, Contingent Liabilities & Contingent Assets).
IAS-37 defines Provision as "A Liability Of Uncertain Timing or Amount".Any thing that fullfills this definition will be qualified as Provision.
Prior to the Enactment of IAS-37 the word "Provision" was used very loosely in financial reporting because of this reason the word "Provision for Depreciation" and "Provision for Doubtful Debts" are considered to be "Provisions", but IAS-37 clarified certain mis-conceptions about the term "Provision".
Provision For Depreciation And Provision For Doubtful Debts are not "PROVISIONS" according to IAS-37, They are only <b>"CONTRA ACCOUNTS"</b> or <b>"Adjustments"</b> to the carrying value of the assets that is why the balances of Provision for Depreciation and Doubtful Debts accounts are having credit balances.
For Example An Entity has an asset with Carrying Value of $10,000 its useful life is 10 years, it charges Depreciation on Straight Line Basis.
The Depreciation will be $1,000/annum
Respective entry will be.
<b>
DRDepreciation=============>$1,000
===>CRProvision For Depreciation===>$1,000
</b>
At the end of the Financial Year the balance of $1,000 in <b>Depreciation account</b> will be transferred to <b>Profit and Loss</b>.
The respective Entry will be,
<b>
DRProfit & Loss A/C======>$1,000
CR====>Depreciation A/C========>$1,000
</b>
And The Balance in <b>"Provision For Depreciation Account"</b> will be used to <b>net off the Asset</b> for example $10,000(Non-Current Assets Account) <b>LESS</b> $1,000(Provision For Depreciation Account)<b> EQUALS</b> $9,000(Net Book Value Of Non-Current Assets).
The conclusion is that the Provision account is just used to adjust the carrying amount the Asset and hence it is not the Provision that is a liability of uncertain timing or amount as defined by IAS-37.
I hope this helps you.
Regards,
Muhammad Amir
