Provision for Accounting Vs Tax Concept about Estimated Expense
*** Note: Estimated Expense such as estimated bad debt, warranty expense, obsolete inventory etc.
Accounting to IAS 37 Provisions, Contingent Liabilities and Contingent Assets, Provision is estimated liability.
Dr. Estimated Expense……xxx
Cr. Provision …………………….xxx
For example, we buy and sell phone, computer, car,printer, scanner etc, we may make warranty contract for customers of repair within specific period ( e.g. 1 year). When we made sale ( e.g. 100,000$ for September 2019), IAS 37 required company make adjusting entry at September 2019 for provision of estimated expense how much customers will come to repair (e.g. 2% of sale) , so we do not wait until customers to repair. Adjusting entry at 31 September 2019:
Dr. Warranty Expense…$2,000 ( 100,000 x 2%)
Cr. Provision for Warranty………$2,000
But Cambodia Tax Law does not recognize this estimated warranty expense ($2,000) (except estimated loan loss for banking sector) as deductible expense, Tax allowed as expense when repair expense incurred (i.e. when customers came to repair).
Example for Accounting Vs Tax Concept for Provision (estimated Expense)
ABC Company sold Phones of $10,000 at 28 December 2016 , and company make Repair Warranty contract for its customers within 2 years.
Assumption:
– 31/12/16 : we make estimation of warranty provision for phone repair =100$ (i.e it is 1% of sale or $100=10,000$ x 1%)
– 30/8/2017 : Customers came to repair phones of $50
– 31/12/2017 : we estimated provision more (not 1%) we will pay more for following year (2018) of $300
Required:
1.Make Accounting Record for Provision
2. Make Tax Record for provision
Solution
1.Accounting Record for provision
31/12/16
Dr. Warranty expense…..100
Cr. Provision…………………….100
30/8/16
Dr. Provision……….50
Cr. Cash……………………….50
31/12/2017
Increase in provision= 300-(100-50)=250$
Dr. Warranty Expense…….250
Cr. Provision………………………250
Note: total warranty expense from 2016 to 2017 is $350 but customer to repair is $50, so remaining estimated amount of $300 will be paid the following year (2018).
2. Tax Record for Provision
31/12/16
No entry because tax law does not recognize estimated repair warranty expense as deductible expense.
30/8/16
Dr. Warranty Expense….50
Cr. Cash……………………….50
Tax law recognized repair expense as deductible expense because it incurred (customers came to repair).
31/12/2017
No entry because tax law does not recognize estimated repair warranty expense as deductible expense.
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