PRC-1 · Chapter 4 · Question 15 of 100
If an accrued expense of Rs. 10,000 at year-end was incorrectly recorded as a prepaid expense, what is the overall mathematical impact on the net profit?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: D) Profit is overstated by Rs. 20,000
Explanation
An accrued expense decreases profit by 10k. A prepaid expense increases profit (by reducing expense) by 10k. Recording it backwards means the profit is overstated by double the amount of the error, which is Rs. 20,000.
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