PRC-1 · Chapter 4 · Question 58 of 100
If a business finalizes its draft accounts and entirely ignores adjusting a valid prepayment for rent of Rs. 5,000, what is the impact on the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: B) Profit is understated and assets are understated.
Explanation
Failing to recognize a prepayment means the entire amount remains in the expense account (making expenses too high and profit understated) and the asset is omitted from the balance sheet (understating assets).
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