Tereshchenko K.S., Moiseieva F.A.

Donetsk National University of Economics and Trade

named after Mykhaylo Tugan-Baranovsky

Common and Different Features of the Deferred Expenses and Provisions for Future Costs and Payments

Activity of any kind of enterprise is oriented on the profit earning which is calculated as a difference between revenues of the reporting period and expenses the entity has incurred to receive those revenues. As a result, fair computation of expenses and their allocation between accounting periods receive crucial importance for the purposes of financial result calculation. In such conditions it is necessary to understand the economic essence of provisions for future costs and deferred expenses categories which are sometimes homologated.

The dissertation of E.G. Melnyk (Ukraine, 2011) is dedicated to the problems of deferred expenses accounting [2]. Provisions for future costs as reserve system elements were partly researched in candidate dissertations of M.O. Kozlova (Ukraine, 2006) [1] and M.M. Oryshchenko (Ukraine, 2009) [3]. However the problem of accurate differentiation between deferred expenses and provisions for future costs is still unsolved. This proves the actuality of the chosen theme.

The purpose of writing the thesis is to conduct comparative characteristic of deferred expenses and provisions for future costs and payments for the further improvement of their accounting methods.

One of provision’s functions is costs planning for subsequent periods. However provision’s amount is judgmental estimate of future results of the definite events. That’s why amount of provided expenses is rare the same as actually incurred expenses. There can appear a situation that amount provided would be not enough to cover expenses in full.

Such scientists as O.V. Anishchenko, A.Y. Gribkov, L.A. Melnikova, L.V. Sotnikova propose the amount of deficit to be recognized as deferred expenses and post the following entry.

Dr account 39 “Deferred expenses”

Cr account of assets consumed or liabilities accrued

In the subsequent months when turnover by Cr would exceed turnover by Dr on the account 47 deferred expenses should be written off as a decrease of provision:

Dr account 47

Cr account 39 “Deferred expenses”

We consider provisions for future costs and deferred expenses are different accounting objects (table 1) and mentioned approach for solving the problem of reserved funds deficit is incorrect in relation of economic essence of the stated categories.

Table 1 – Comparative characteristic of the provisions for future costs and deferred expenses

№	Comparative criteria	Provisions for future costs and payments	Deferred expenses
Common features:
1.	Time reference	Relate to the following accounting periods of entity’s activity
2.	Type of account for mentioned objects	Objects are accounted on financial distributional or budgetary distributional accounts (39 “Deferred expenses” and 47 “Provisions for future costs and payments”)
Different features:
1.	Reason for recognition in accounting	Created to cover future operational expenses of the enterprise for liabilities settlement with indefinite amount and time of repayment	Are the results of accrual basis and matching concept in accounting
2.	Moment of actual expenses appearance	Subsequent accounting periods	Current accounting period
3.	Presence of reserved character	Provision is a reserve, e.g. provision represents stock of funds which is formed to cover liabilities with indefinite amount and time of repayment on the balance-sheet date	Absence of reserved character
4.	Type of account for mentioned objects in relation to balance-sheet	Liability account	Asset account

The main criteria for differentiation of deferred expenses and provisions for future costs and payments is the moment of actual expenses appearance and, as a result, mechanism of their operation.

Deferred expenses represent expenses actual payment for which was settled in the current reporting period but due to the accrual basis and matching concept for revenues and expenses they relate to subsequent accounting periods. Provisions for future costs and payments are the expenses to be recognized in the current accounting period but actual outflow of assets or increase in liabilities will be in future accounting periods. For example, if excess of actual amount of vacation accrual expenses for employee which takes vacation in January 2012 under amount of remaining reserved funds as at beginning of the current month to include to deferred expenses (expenses of February-December 2012), then from economic point of view employee hasn’t receive the right for vacation. In such case entity makes an advance to employee. Indeed the right for vacation employee has earned during 2011.

Despite the definite common features provisions for future costs and payments are converse to deferred expenses. Therefore it is inappropriate to solve the problem of deficit of reserved funds by the way of deferred expenses recognition in accounting.

References

1. Козлова М.О. Облік і контроль процесу резервування (на прикладі діяльності великих промислових підприємств України): Дис... канд. екон. наук: спец. 08.06.04 «Бухгалтерський облік, аналіз та аудит» / М.О.Козлова; Житомирський держ. технологічний ун-т. — Житомир, 2005. – 330 с.

2. Мельник Е.Г. Облік і контроль витрат майбутніх періодів: теорія і методика: автореф. дис. … канд. ек. наук: 08.00.09 / Е.Г.Мельник. – К., 2011. – 20 с.

3. Орищенко М.М. Облік і аудит резервів капіталу: методологія та організація: автореф. дис... канд. екон. наук: спец. 08.00.09 «Бухгалтерський облік, аналіз та аудит (за видами економічної діяльності» / М.М.Орищенко; Київський національний торговельно-економічний ун-т. — К., 2009. — 20 с.