PRC-1 · Chapter 5 · Question 90 of 100
If an entity has zero opening allowance and creates an allowance of Rs. 5,000 at year-end, what is the effect on the fundamental accounting equation?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Assets decrease by 5,000, Equity decreases by 5,000.
Explanation
The creation of the allowance decreases Net Trade Receivables (Assets decrease by 5k) and creates an expense which reduces profit (Equity decreases by 5k), keeping the equation balanced.
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