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Hi John
Inventory at 31 October 20×6 was valued at $275,000 based on its original cost. However $45,000 of this inventory has been in the warehouse for over two years and the directors have agreed to sell it in November 20×6 for a cash price of $20,000.
The administrative expenses include $5,000 which relates to November 20×6. The allowance for receivables is to be increased to the equivalent of 5% of trade receivables. There are wages and salaries outstanding of $40,000 for the year ended 31 October 20×6.
Will the following items be debited or credited to profit for the year?
1. Inventory valuation adjustment
2. Administrative expenses relating to November 20×6Can you explain why #1 should be debited and #2 should be credited?
When we debit the profit we are reducing the profit, when we credit the profit we are increasing the profit.
For inventory we are reducing the value and therefore there is less profit.
For admin expenses we are reducing the expense (because of the prepayment) and therefore there is more profit.
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