PRC-1 · Chapter 10 · Question 92 of 100
A business forgot to adjust for prepaid insurance of Rs. 2,000 at year-end. What is the impact on the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Net profit is understated; Assets are understated.
Explanation
Failing to record a prepayment means the entire paid amount was expensed, making expenses too high (understating profit). The prepaid asset is also missing from the balance sheet (understating assets).
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