Dave,
Provisions usually fulfil the same purpose as reserves, i.e. it is capital in
equity reserved by by the board of directors to meet some specific purpose, in
this case expected future liabilities of the company, usually something like a
law suit in progress which may result in a future liabilty where the board
wishes to reserve funds to have them available should the suit be lost.
A possible account structure would be
Equity:Reserves:Provision for Liabilities.
Money would normally be allocated out of Retained Earnings possibly over several
years recorded as follows in each case,
Debit Credit
Equity:Retained Earnings xxx
Equity:Reserves:Provision for Liabilities xxx
If the case is ultimately lost then a liability will be incurred for the
settlement which is recorded against a capital account rather than an expense
account
Debit Credit
Equity:Reserves:Provision for Liabilities yyy
Liability:Accounts Payable yyy
which is recorded as follows when it is paid
Debit Credit
Liability:Accounts Payable yyy
Assets:Bank yyy
This is of course subject to the business rules and regulations in the
particular jurisdiction which may impose a different treatment and should not
be considered as accounting advice, just as an illustration of a possible
treatment.
Any unused reserves would be reallocated to retained earnings in a reversal of
the first transaction for the amount unused.
David Cousens
On Sat, 2021-12-11 at 00:34 +0000, Dr. David Kirkby wrote:
> With all the usual disclaimers (not an accountant, not their jurisdiction,
> ask your accountant), can anyone suggest where it would be sensible to
> record "Provision for liabilities" in GnuCash? It is defined on the balance
> sheet as
>
> *Provisions *
>
> *Provisions (ie liabilities of uncertain timing or amount) are recognised
> when there is an obligation at the reporting date as a result of a past
> event, it is probable that economic benefit will be transferred to settle
> the obligation and the amount of the obligation can be estimated reliably. *
>
> Does it seem reasonable, from the point of using the software, to just
> stick it in as a liability? I was thinking of creating a "Provision"
> liability under the Liability account
>
> If anyone can confirm my suspicion seems reasonable, or can suggest a
> better place to record this, I will do so.
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