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Hi sir,
I didnt understand anything from this question and answer.Please help to understand.Thanks in advanceDrive incurred bank charges of $40, which was then credited to the bank interest receivable
account.
What was the effect upon profit for the year of recording the bank charges in this way?
A Profit will be unchanged
B Profit will be overstated by $80
C Profit will be understated by $80
D Profit will be understated by $40Answer:
B
Accounting for an expense should reduce profit. By crediting $40 to the Bank interest
receivable account, when bank charges should have been debited to an expense account,
has the effect of increasing profit by $40, rather than the proper outcome of reducing profit
by $40. As a result of this error, profit has been overstated by 2 × $40 = $80.I am not really sure what to say because you have not said which bit of the answer you are not clear about.
They have recorded the expense as though it was income. Therefore they are showing $40 of income that should not be there, so to remove that we need to reduce the profit by $40.
They should have recorded an expense of $40 and they have not, so recording that reduces the profit by another $40. So at the moment the profit is a total of $80 more than it should be – it is overstated.Have you watched my free lectures? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
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