PRC-1 · Chapter 5 · Question 43 of 100
If an accountant calculates the general allowance on the GROSS receivables balance without first deducting a recently identified bad debt of Rs. 10,000, what will be the resulting error?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) The allowance will be overstated.
Explanation
By applying the percentage to a pool that includes a debt known to be bad (and therefore holding a 0% chance of recovery through the general pool), the calculated general allowance estimate will be artificially inflated (overstated).
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