An accrual and a provision can look almost identical in the books:
Debit an expense. Credit a liability.
So why are they different?
The answer is not simply:
Accrual = known amount
Provision = estimated amount
Both can involve estimates.
The better question is:
What created the obligation, and how uncertain is it?
The short answer
An accrual records an obligation that has already arisen, but the invoice, payment, or final amount may still be pending.
A provision, under IFRS Accounting Standards, is a liability where the timing or amount is more uncertain.
A simple way to think about it:
| Trade Payable | Accrual | Provision | |
|---|---|---|---|
| Obligation exists | Yes | Yes | Yes |
| Invoice available | Usually yes | Often no | Not the key issue |
| Estimation involved | Limited | Often | Usually |
| Uncertainty | Low | Moderate | Higher |
| Example | Supplier invoice received | Service received, invoice pending | Legal claim |
Accrual: the work has happened, the invoice has not
Suppose a consultant completes work in March.
By March 31:
- the service has been received;
- no invoice has arrived;
- finance estimates the cost at $20,000.
The expense belongs to March.
So the company records:
| Account | Debit | Credit |
|---|---|---|
| Consulting expense | $20,000 | |
| Accrued liability | $20,000 |
The amount is estimated.
But that does not make it a provision.
The key point is that the underlying obligation is clear. The uncertainty is relatively limited.
Provision: more uncertainty around the obligation
Now consider a legal dispute.
A past event has occurred, but the company may still need to assess:
- whether a present obligation exists;
- whether an outflow is probable;
- how much settlement may cost;
- when settlement may occur.
If the recognition criteria under IAS 37 are met, the company may recognise a provision.
A simplified entry might be:
| Account | Debit | Credit |
|---|---|---|
| Legal expense | $100,000 | |
| Provision | $100,000 |
The entry looks similar to an accrual.
The judgment behind it is very different.
The most common misconception
One of the most common explanations is:
“Accruals are exact. Provisions are estimates.”
That is misleading.
Accruals are often estimated.
Examples include:
- services received but not invoiced;
- utilities consumed but not yet billed;
- employee compensation earned but unpaid.
The better distinction is:
Accruals usually involve lower uncertainty. Provisions involve greater uncertainty over timing or amount.
Three quick examples
1. Professional services
A law firm completes work in March.
The invoice arrives in April.
Accrual.
The service has already been received and the liability is reasonably clear.
2. Product warranty
A company sells products with an assurance-type warranty.
Some customers are expected to make claims, but the exact timing and cost are uncertain.
Potentially a provision under IFRS, if the IAS 37 recognition criteria are met.
3. Legal claim
A company is facing a lawsuit arising from a past event.
The first question is not:
“How much should we book?”
The first question is:
Does a present obligation actually exist?
Only after that does finance assess probability and measurement.
What happens when the invoice arrives?
Suppose finance accrued $20,000 in March.
The actual April invoice is $19,200.
The company then clears or reverses the accrual and records the actual invoice.
The objective is simple:
Recognise the expense once and true-up the estimate correctly.
This is why good accrual accounting also requires:
- reversal or clearing controls;
- invoice matching;
- reconciliation;
- true-up.
IFRS vs US GAAP
The word provision is especially important under IFRS because IAS 37 specifically governs provisions, contingent liabilities, and related obligations.
US GAAP does not have one single equivalent “provisions” standard.
Depending on the issue, guidance may come from areas such as:
- ASC 450 for many loss contingencies;
- ASC 460 for certain guarantees and warranties;
- other specific Codification Topics.
So:
IFRS provision ≠ automatically the same thing as a US GAAP loss contingency.
The terminology and recognition thresholds can differ.
Practitioner Lens
During close, the distinction matters because the workflow is often different.
A routine accrual may look like:
service received → estimate → journal entry → invoice → true-up
A provision may look more like:
identify event → determine obligation → assess probability → estimate exposure → review evidence → reassess
That leads to a much better close question:
Has an obligation arisen, and what exactly remains uncertain?
That is more useful than simply asking:
“Is this an accrual or a provision?”
Test Yourself
Scenario 1
March services are complete, but the invoice has not arrived.
Answer: Accrual
Scenario 2
A supplier invoice has already been received and approved.
Answer: Trade payable
Scenario 3
A legal matter involves uncertainty over whether a present obligation exists and how much it may cost.
Answer: Potentially a provision, subject to the applicable recognition criteria
The takeaway
Accruals and provisions can both involve estimates.
The real difference is not:
known vs estimated.
It is better understood as:
Accrual = obligation is clear, uncertainty is usually lower.
Provision = obligation meets recognition criteria but involves greater uncertainty over timing or amount.
So the next time someone asks:
“What’s the difference between an accrual and a provision?”
Start with the obligation.
Then ask what remains uncertain.