What is the Difference Between Liability and Provision?
🆚 Go to Comparative Table 🆚The main difference between liability and provision lies in the certainty and timing of the obligation.
Liability:
- A liability is a present obligation as a result of past events, and settlement is expected to result in an outflow of resources (payment).
- Liabilities are certain or likely to occur, and the amount and timing of the obligation are known.
- Examples of liabilities include accounts payable, salaries payable, and taxes payable.
Provision:
- A provision is a liability of uncertain timing or amount.
- Provisions are recognized when a present obligation takes place due to an event in the past, but the timing or amount of the obligation is uncertain.
- Provisions are measured at the best estimate of the expenditure required to settle the obligation at the balance sheet date.
- Examples of provisions include warranty obligations, legal or constructive obligations to clean up contaminated land or restore facilities, and obligations caused by a retailer's policy to make refunds to customers.
In summary, a liability is a certain and known obligation, while a provision is an uncertain and unpredictable obligation that may arise from past events.
Comparative Table: Liability vs Provision
Here is a table summarizing the key differences between provisions and contingent liabilities:
| Aspect | Provision | Contingent Liability |
|---|---|---|
| Nature | A decrease in the value of an asset due to a present obligation arising out of a past event. | A potential liability that can occur at a future date due to events beyond a company's control. |
| Certainty of the event | The event resulting in a provisional liability may or may not occur. | The event resulting in a contingent liability is certain to occur. |
| Estimate of the liability | The estimated amount of the provisional liability is not certain. | The estimated amount of the contingent liability is largely certain. |
| Profit and Loss Account | Any increase or decrease in provision liability gets recorded in the Profit and Loss Account. | The Profit and Loss Account does not record a contingent liability. |
In accounting, a provision is a liability whose amount and timing of occurrence are not definite. Provisions are recorded in the balance sheet as current liabilities. On the other hand, a contingent liability is an unrecognized liability that is not recorded in the balance sheet but is disclosed in the notes to the financial statements. Contingent liabilities are created when there is a potential future obligation, but the amount cannot be reasonably estimated.
- Provision vs Contingent Liability
- Accruals vs Provisions
- Reserve vs Provision
- Liability vs Indemnity
- Liability vs Debt
- Liability vs Equity
- Liability vs Asset
- Liability vs Negligence
- Liabilities vs Expenses
- Depreciation vs Provision for Depreciation
- Give vs Provide
- Obligation vs Responsibility
- Limited vs Unlimited Liability
- Guaranty vs Guarantee
- Current vs Long Term Liabilities
- Rights vs Responsibilities
- Guarantee vs Guarantor
- Lien vs Levy
- Role vs Responsibility