PRC-1 · Chapter 5 · Question 73 of 100
If an entity recovers a previously written-off debt but mistakenly credits it to the customer's account in the Receivables Ledger instead of Profit or Loss, what is the effect on the financial statements?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: A) Profit is understated, and Receivables are understated.
Explanation
Crediting Receivables instead of Bad Debts Recovered (Income) artificially reduces the Receivables balance (understating assets) and fails to record the income (understating profit).
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