PRC-1 · Chapter 5 · Question 64 of 100
An accountant wrote off a bad debt of Rs. 4,000 by debiting Bad Debt Expense and incorrectly crediting Accounts Payable instead of Trade Receivables. What is the impact of this error on the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Profit is unaffected, but Assets and Liabilities are both overstated by Rs. 4,000.
Explanation
The expense was recorded correctly, so profit is accurate. However, crediting Payables wrongly increased liabilities, and failing to credit Receivables left assets too high. Thus, both are overstated.
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