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Hi,sir.
A very good day to you.i have a question want to ask?this question is a business decreases it’s allowance for receivables by $1600.
What will be the effect of this adjustment on the financial statements?Profit for the year Trade receivables (net)
A)Decrease by $1600. Decrease by$1600
B)Decrease by$1600. Increase by$1600
C)Increase by$1600. Decrease by$1600
D)Increase by$1600. Increase by $1600The answer is D.
I don’t understand this question.Can you explain to me why this question the answer is D.
Kindly reply,
Thank you.Net receivables is receivables less allowance.
So if the allowance is reduced, then net receivables increases.As far as the profit for the year is concerned, increasing the allowance is an expense (and therefore less profit), but reducing the allowance is a saving (or ‘negative’ expense) and therefore more profit.
If you have not already done so, then you really should watch the free lecture on Irrecoverable and Doubtful Debts.
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