Businesses face future obligations of varying certainty. Accounting distinguishes provisions (recognised in the accounts) from contingent liabilities (only disclosed), based on probability and measurability.
This guide explains the difference.
What is provisions and contingent liabilities?
A provision is recognised when a present obligation is probable and can be reliably estimated — for example, a provision for warranty or bad debts. A contingent liability is a possible obligation whose outcome is uncertain, and is only disclosed in the notes.
This prudent treatment avoids overstating profit.
Provision vs contingent liability
| Aspect | Provision | Contingent liability |
|---|---|---|
| Probability | Probable | Possible/uncertain |
| Measurable | Yes, reliably | Often not |
| Treatment | Recognised in accounts | Disclosed in notes only |
Frequently asked questions
Is a provision an expense?
Yes. Creating a provision recognises an expense and a corresponding liability in the current period.
When is a contingent liability recorded?
It is not recorded in the accounts — only disclosed in the notes unless it becomes probable and measurable, when it becomes a provision.