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A company’s statement of profit or loss for the year ended 31 December 20X5 showed a net profit of $83,600. It was later found that $18,000 paid for the purchase of a motor van had been debited to the motor expenses account. It is the company’s policy to depreciate motor vans at 25% per year on the straight-line basis, with a full year’s charge in the year of acquisition.
What would the net profit be after adjusting for this error?I don’t understand how he correct the error and what is the motor car expenses account is it different than the car account ?
thank you for your answer
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The motor car expenses account is certainly different than the car account. The car is a non-current asset which will therefore appear in the Statement of financial position (and will not affect the profit), whereas the expense account will appear in the Statement of profit or loss and will affect the profit.
In this question $18,000 was charged as an expense when it should not have been, and so the expense needs removing which will make the correct profit higher.
However, because it is actually a non-current asset it should have been depreciated, and therefore the amount of the depreciation will reduce the profit.
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