ACCA FA · Chapter 7 · Question 3 of 12
A business failed to record a prepayment of $2,000 at the year end. What is the effect of this error?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Profit is understated by $2,000 and current assets are understated by $2,000
Explanation
A prepayment reduces the expense for the period and is shown as a current asset. If it is omitted, the full amount remains in expenses, so profit is understated by $2,000, and the asset (prepayment) is missing, so current assets are also understated by $2,000.
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