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Q- Drive incurred bank charges of $40, which was then credited to the bank interest receivable account. What was the effect on profit for the year of recording the bank charges in this way?
A. Profit will be unchanged
B.Profit will be overstated by $80
I chose answer A but the correct answer is B. Is this an interest income account(not receivable)? If we take it like that then the answer is B but I thought this was a receivable account. Can you explain it to me sir?
Bank charges are an expense and should therefore have been debited to the bank charges account.
Crediting interest receivable increases the profit but the expense should have reduced the profit.