Provision and Contingent Liability difference

Provision and Contingent Liability difference

Provision and contingent liabilities are quite different concept. Provision is liability of an estimated amount, where contingent liability totally depends on future event and may not be regarded as liability unless such event happens. Difference between contingent liability and provision has been explained below;

1.    Past Event

Provision depend on the past event (event has already occurred), where contingent liability may be based on the future event. Examples of past event sales made during year, purchased made during year.

2.    Reasonable Estimates

In case of provision a reliable or reasonable estimate can be made about the liability, where in case of contingent liability such estimate cannot be made. Reasonable estimates for provisions can be made on the bases of relevant historical data, or industry practices.

3.    Recognition

Provisions are recognized in books of account as liability, where contingent liabilities are not recognized in book of account, rather disclosed in financial statement. It is important to note that disclosure is included in the financial statements for user information only and does not affect the financial performance (profit) or financial position.

4.    Examples

Examples of provision are provision for bad debts, provision for warranty against sales made. Examples of contingent liabilities include an outcome of lawsuit filed against company for damages, an expected fine by the regulator of uncertain amount etc.