End-of-service provision
End of Service Benefit Provision
In one sentenceA liability the business records in its books for the end-of-service benefits employees have earned up to the statements date, so the expense is spread over the years of work.
Simply put
Instead of the business bearing the whole benefit in the year the employee leaves, at the end of each year it calculates what has been earned so far and records it as a provision among liabilities.
The difference between the required provision balance and its previous balance is the year's expense. This way the income statement reflects the employee's real cost every year.
Worked example
A factory has one employee. The benefit due to him at year end is 12,000 SAR, and the provision balance at the start of the year is 8,000 SAR.
Required provision at year end12,000
Provision balance at the start of the year8,000
Dr End-of-service benefit expense4,000
Cr End-of-service benefit provision4,000
Provision expense for this year4,000 SAR
Formula: Year's expense = required provision at year end − its balance at the start of the year + what was paid from it during the year
Don't confuse it with
End-of-service benefitThe provision is an accounting estimate that builds up, while the benefit is the amount actually paid when the contract ends.