What journal entry is made when recognizing a provision?

What journal entry is made when recognizing a provision?

• A. Dr. Cash Account, Cr. Provision Account
• B. Dr. Expense Account, Cr. Provision Account
• C. Dr. Provision Account, Cr. Revenue Account
• D. Dr. Expense Account, Cr. Cash Account

Answer: (B)

When recognizing a provision, the appropriate journal entry involves debiting an expense account and crediting a provision account. This reflects the obligation a company has to recognize an expense that will occur in the future, based on past events or current conditions, and ensures that the financial statements appropriately reflect this liability. By debiting the expense account, the company acknowledges that it will incur an expense in the future, impacting its profitability. This is in accordance with the accrual basis of accounting, which dictates that expenses should be recognized when they are incurred, not when cash is paid. Conversely, crediting the provision account establishes a liability on the balance sheet, indicating that there is a future outflow of resources expected. This method ensures that financial statements present a true and fair view of the company's financial position, with all foreseeable liabilities accounted for. It is essential in ensuring compliance with accounting standards that require companies to recognize provisions for liabilities reliably.

When recognizing a provision, the appropriate journal entry involves debiting an expense account and crediting a provision account. This reflects the obligation a company has to recognize an expense that will occur in the future, based on past events or current conditions, and ensures that the financial statements appropriately reflect this liability.

By debiting the expense account, the company acknowledges that it will incur an expense in the future, impacting its profitability. This is in accordance with the accrual basis of accounting, which dictates that expenses should be recognized when they are incurred, not when cash is paid. Conversely, crediting the provision account establishes a liability on the balance sheet, indicating that there is a future outflow of resources expected.

This method ensures that financial statements present a true and fair view of the company's financial position, with all foreseeable liabilities accounted for. It is essential in ensuring compliance with accounting standards that require companies to recognize provisions for liabilities reliably.