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Why the ‘gross profit’ is not affect when allowance for receivable increases or decrease?
So, if the allowance for receivable increases/decrease is just affect to ‘net profit’, is that right?You are correct that it only affects the net profit.
The reason is does not affect the gross profit is that the gross profit is showing the difference between the sales and the cost of the sales. Customers who are irrecoverable or doubtful are effectively costing us money (and so reducing net profit) but it is not because we are selling at a lower price or because the goods cost us more.
Thanks you:). Your explain shows me meticulously about the problem i have. Because the answer in book is too concise to be difficult for me to understand.
You are welcome 🙂
(I hope also that you are using our free lectures for Paper F3 (with the free lecture notes that go with them))
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