A company estimates that Rs 90,000 will be required to settle a present warranty obligation. Which entry records the provision?
Correct answer: B. Debit warranty expense Rs 90,000 and credit provision Rs 90,000
- A. Debit provision Rs 90,000 and credit cash Rs 90,000
- B. Debit warranty expense Rs 90,000 and credit provision Rs 90,000
- C. Debit cash Rs 90,000 and credit warranty income Rs 90,000
- D. Debit provision expense Rs 90,000 and credit inventory Rs 90,000
Explanation
Recognizing the provision records the expected cost in the income statement and the obligation in the statement of financial position. Therefore, warranty expense is debited and the provision liability is credited. Cash is recorded only when payment is made.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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