When an established warranty provision is used to pay a valid claim, which entry is normally made?
Correct answer: B. Debit provision and credit cash
- A. Debit warranty expense and credit cash
- B. Debit provision and credit cash
- C. Debit cash and credit provision
- D. Debit inventory and credit warranty income
Explanation
The provision was already charged as an expense when the expected obligation was recognized. When the claim is settled, the provision is debited to remove the liability and cash is credited for the payment. A second expense is not normally recorded for the same claim.
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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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