PRC-1 · Chapter 4 · Question 82 of 100
If an accountant completely omits the year-end adjusting entry for a prepaid expense (which was initially recorded as an asset), what is the effect on the statement of profit or loss?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Profit will be overstated.
Explanation
If the prepaid asset is not adjusted, the expired portion is not transferred to expenses. Because expenses are understated, the net profit will be overstated.
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