Hi sir, please help me!
Drive 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 40
I dont understand it why is the correct answer B ,not A?
Thanks in advance!
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Correction of error
7y ago#1The correct double entry for bank charges is Credit Cash; Debit Bank charges expense account.
They have credited interest receivable by mistake.
Crediting interest receivable means they will be showing profit at $40 to high.
The fact that they should have recorded it as an expense but haven't done so means that profit is an another $40 to high.
So in total, the profit at the moment is $80 more than it should be.
Have you watched my free lectures on adjustments to profit? The lectures are a complete free course for Paper FA and cover everything needed to be able to pass the exam well.
So sorry sir, i dont understand it that interest receivable is a balance sheet account and just have cr interest receivable account ,why does it reflect to the profit? Because there is no interest income.
7y ago#3It isn't a balance sheet account (although the name we give it is confusing). The have recorded the bank charges as though they were interest income (by crediting the interest account) when they should have recorded it as expense.
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