Business expenses and provision for business expenses
Business expenses
What is a business expense? Is business expense the same as provision for business expenses? The answer to the second part is NO. Business expense and provision for business expense are not the same. First we define the term business expense and give the point of details thereof then towards the tail end we will briefly introduce the term provisions for expenses and demonstrate the difference between the two terms for they confuse learners and other users.
Business expense is the cash outflow paid by the business to a third party as a result of the former (the business) receiving some services. Business expense in general is further categorized in to two major classes based on the nature of expense criteria that is; revenue expenses and capital expenses.
Provision for business expenses
Definition - Provision for business expenses is an allowance created by the business to protect the net profit from being exaggerated. It is an amount set aside in writing but it does not involve actual cash outflow from the business.
Although provision for expenses is an allowance and does not involve actual cash out flow as it is in business expense, it is still charged to profit and loss account as an expense. Sometimes end of year adjustments are necessary so as to capture the exact allowance in the final accounts.
Difference between business expense and provision for business expense
The following Table summarizes the difference between a business expense and provision for business expense so as to eradicate the misconception with users thereof
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Business Expenses
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Provision for Business Expenses
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1.
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Involves actual cash out flow
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1.
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Does not involve actual cash out flow
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2.
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Occurs continuously either daily or on monthly basis
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2.
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Created or provided for at the end of a certain period-end of the year
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3
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It obviously occurs in the business
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3
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It has to be created to avoid overstating of the net profit
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4
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It is not optional for they are resources normally utilized to be in operations
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4
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It is optional. The management may create it or leave it
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5
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Represented as a debit entry in the respective ledger account
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5
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Represented as a credit entry in the respective ledger account
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6
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Non-cumulative- i.e. Per annum period amount
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6
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It is cumulative hence recurring
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About the Author - Dr Geoffrey Mbuva(PhD-Finance) is a lecturer of Finance and Accountancy at Kenyatta University, Kenya. He is an enthusiast of teaching and making accounting & research tutorials for his readers.
