The correct answer is: A. For a known liability whose amount can be very accurately determined.
A provision is a liability that is not recognized in the financial statements because it is not certain that it will occur or the amount cannot be reliably estimated. A known liability is a liability that is certain to occur and the amount can be reliably estimated. For example, a company may have a known liability for employee salaries that have been earned but not yet paid. The amount of this liability can be reliably estimated based on the number of employees and the amount of their salaries.
A provision is created by debiting an expense account and crediting a liability account. The expense account is increased by the amount of the provision, and the liability account is increased by the same amount. The provision is then recognized in the income statement as an expense.
The amount of the provision is based on the best estimate of the liability. This estimate is made using the information that is available at the time the provision is created. The estimate is reviewed and updated as new information becomes available.
Provisions are used to account for a variety of liabilities, including:
- Accrued expenses
- Warranty costs
- Income taxes
- Environmental liabilities
- Litigation liabilities
Provisions are an important part of financial reporting. They provide information about the company’s future obligations and help to ensure that the financial statements are accurate.
Option B is incorrect because it refers to a known liability whose amount cannot be very accurately determined. In this case, the liability is not recognized in the financial statements because it is not certain that it will occur or the amount cannot be reliably estimated.
Option C is incorrect because it refers to an unknown liability. An unknown liability is a liability that is not certain to occur and the amount cannot be reliably estimated. In this case, the liability is not recognized in the financial statements because it is not certain that it will occur or the amount cannot be reliably estimated.
Option D is incorrect because it refers to a provision for any general or specific purpose. A provision is created for a specific liability, not for a general or specific purpose.