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Hi,
1. An increase in an allowance for receivables of 8000 has been treated as a reduction in the allowance in the financial statements. Which of the following explains the resulting effects?
Ans: Net profit overstaed by 16000, receivables overstated by 16000Could you pelase help me to explain the above question?
Thanks.the journal entries for allowance for doubtful debts are thus: where x are the amounts and cu the currency unit
allowance for doubtful debts expense CUx
allowance for doubtful debts CUx
You can see that the expense affects the Income statement entry while the allowance for doubtful debts entry is a contra against receivables which reflects in the balance sheet.
therefore, since profits = revenue – expenses, overstating expenses understates profits.
therefore, profits are understated by the increment. Hence, profits are understated by 8000.
allowance on receivables is a BS item and is a credit on the Receivable (debtor) itself, therefore, the increment understates an asset item in the BS by 8000.
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allownce for receivable is epense and when expense become understated then profit will automatically overstated by double amount and asset (receivable)also become overstated by double amount…did u get that?
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