Question

Distinguish between a current liability, such as accounts payable, and a provision.

Short answer

Accounts payable is defined as the sum total of debts a company owes to its creditors for goods or services purchased on credit. Whereas a provision is defined as the amount that is kept aside out of profit earned for incurring anticipated expense or depreciation in the asset value, although the exact amount is yet to be ascertained.

Step-by-step solution

Definition of Current liabilities

Current liabilities are liabilities payable in an accounting year. These liabilities are created either out of realization from current assets or by the formation of new current liability.

Difference between provision and accounts payable

Accounts payable and provision can be differentiated on the following grounds:

• Provision is regarded as an estimated liability that may take place in the future, whereas accounts payable is considered as an actual amount of liability that has already taken place in an accounting year but yet is to be paid off.

• Provisions are recorded separately under the heading provision in the liabilities section of the balance sheet. Whereas accounts payable are recorded under the current head liabilities in the liabilities section of the balance sheet.

• Examples for provision are proposed dividend, provision for depreciation, repairs and renewals, provisions for doubtful debts, and provident fund. On the other hand, examples for accounts payable include acquisition of raw materials, transportation expense, traveling expense, leasing, and licensing.