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A company has prepared draft accounts for the year ended 31 March 20X9 incorporating the managing director’s bonus of 4% of net profit.
It has now been discovered that the draft accounts omitted trade discounts allowed to customers of $100,
cash discounts allowed from suppliers of $400 and a rent prepayment of $200————————————
Why is rent prepaid added as an adjustment to profit? It is not an expense that is incurred for that year?
If they have prepaid rent then the amount prepaid is not an expense of this year (it is an expense of next year).
Therefore this years expense is lower by the amount prepaid, which means that the profit is higher.
Ah ok! So the question is actually saying that the adjustment for rent prepayment was omitted and that amount was left in the expense account so we would need to remove it.
Thank you for clarifying!!!
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