Accruals vs Provisions: What Is the Difference and When to Use Each

Finance teams often use "accrual" and "provision" interchangeably, but they are distinct concepts with different accounting treatments. Using the wrong one can overstate or understate your liabilities — and lead to audit questions.

What Is an Accrual?

An accrual is a liability for costs that have been incurred but not yet invoiced or paid. The amount is known or can be estimated reliably. Examples include the last payroll run of the month that has not been processed, utility bills for usage in the period where the invoice has not arrived, and professional fees for work completed but not yet billed.

The key characteristics of an accrual: the obligation exists and the amount can be estimated with reasonable accuracy. In most cases, the estimate is confirmed within a few weeks when the actual invoice arrives.

What Is a Provision?

A provision is a liability of uncertain timing or amount. Under FRS 102 (Section 21), a provision should be recognised when: (1) there is a present obligation as a result of a past event; (2) it is probable that an outflow of resources will be required; and (3) the amount can be estimated reliably.

Examples of provisions include a warranty provision for products sold that may need repair, a provision for a pending legal claim where the outcome is uncertain, a restructuring provision for a plan that has been announced, and a dilapidations provision for the cost of restoring a leased property.

Why the Distinction Matters

Balance Sheet Presentation

Accruals typically sit within "trade and other payables" as current liabilities. Provisions are shown separately, often as a distinct line item on the balance sheet — "provisions for liabilities and charges". This matters for financial ratio analysis and for auditors reviewing the completeness of liabilities.

Reversal Behaviour

Accruals reverse cleanly: you accrue in December, the invoice arrives in January, you reverse the accrual and book the actual. Provisions are different — they are reviewed at each period-end and increased, decreased, or released based on updated estimates. A dilapidations provision might sit on the balance sheet for years.

Audit Scrutiny

Provisions attract more audit attention than accruals because they involve judgement. Your auditors will want to understand the basis of estimate, the probability of outflow, and whether the provision has changed versus prior year — and why.

Common Mistakes

• Recording a warranty liability as an accrual when it should be a provision (it is uncertain, not just unprocessed)
• Recognising a provision for a contingent liability where the outflow is possible but not probable — FRS 102 requires only disclosure in that case, not recognition
• Reversing a provision in full when the event resolves at a lower amount — the difference should be released to the P&L, not offset against other items
• Using "provision" as a general term for any estimated liability — creating confusion in financial reviews

A Simple Decision Framework

Ask two questions: (1) Has the cost been incurred, and is the amount known or will it be confirmed soon? If yes, it is an accrual. (2) Is there an obligation that may require a payment, but the amount or timing is genuinely uncertain? If yes, it is a provision. If neither applies — for example, a future cost that has not yet been incurred — it should not be recognised at all.