Effect of prepayment on net profit

Effect of prepayment on net profit

This topic has 3 replies, 1 voice, and was last updated 3 months ago by jermy01.

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March 13, 2016 at 7:05 am #306127
Gwen Henry
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Q. After completing his final accounts, Kevin found that he has understated a prepayment.

How are Kevin’s net profit and capital affected by the correction of error?

Net Profit Capital
A. Increased Increased
B. Increased Decreased
C. Decreased Increased
D. Decreased Decreased
March 13, 2016 at 8:52 am #306144
Ken Garrett
Keymaster
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A prepayment says that some of the payment is in respect of the next year. Therefore that would increase this year’s profits.

If you make more profit capital must be higher (ie think of the prepayment as an asset).

Answer A is correct.
March 13, 2016 at 2:22 pm #306180
Gwen Henry
- Topics: 12
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Thank you.
November 23, 2020 at 1:30 pm #596150
jermy01
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- Replies: 1
its help a lot thanks
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