Which statement best distinguishes a provision from a reserve?
Correct answer: A. A provision is an estimated liability, while a reserve is an appropriation of profit
- A. A provision is an estimated liability, while a reserve is an appropriation of profit
- B. A provision is an asset, while a reserve is an expense payable
- C. A provision is paid in cash, while a reserve is always unpaid
- D. A provision records revenue, while a reserve records depreciation
Explanation
A provision is recognized for a present obligation whose amount or timing is uncertain. A reserve generally represents profit retained or appropriated for a purpose and is not, by itself, an obligation to an external party.
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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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