PRC-1 · Chapter 5 · Question 21 of 100
A bookkeeper accidentally writes off a bad debt of Rs. 1,000 by debiting 'Bad Debt Expense' and crediting 'Accounts Payable'. What is the direct impact of this error on the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Profit is unaffected, but liabilities are overstated and assets are overstated.
Explanation
The expense is correctly recorded (profit is correct), but crediting Payables instead of Receivables artificially increases liabilities and fails to reduce assets. Therefore, both liabilities and assets are overstated by Rs. 1,000.
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