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An increase in an allowance for receivables of $2,000 has been treated as a reduction in the
financial statements. What is the effect of this error on profit and net assets?Dear sir – the answer says both profit and net assets are overstated by 4000
But if didnt increase the allowance – profit will be increased by 2000
If asset is 40,000 and i create an allowance it should be 38000hows both the items overstated by 4000. Please help
The allowance was increased and so both items should have been reduced by 2000.
However they recorded it as if it had been reduced and so in fact both items were increased by 2000.
So instead of both items being reduced by 2000 they have increased both items by 2000, which means that are both 4000 more than they should have been.
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