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A decrease in the provision for doubtful debts would result in _____
- a)Increase in liability
- b)Decrease in liability
- c)Decrease in net profit
- d)Increase in net profit
Correct answer is option 'D'. Can you explain this answer?
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Most Upvoted Answer
A decrease in the provision for doubtful debts would result in _____a)...
Explanation:
When a company provides for doubtful debts, it is setting aside a portion of its accounts receivable as a reserve to cover potential bad debts. This reserve is recorded as an expense on the company's income statement, which reduces its net profit. However, if the provision for doubtful debts decreases, it means that the company is reducing its reserve for bad debts. As a result, its net profit will increase because the expense recorded on the income statement will be lower.
Therefore, the correct answer is D) Increase in net profit.
To summarize:
- Provision for doubtful debts is a reserve set aside to cover potential bad debts.
- It is recorded as an expense on the income statement, which reduces net profit.
- If the provision for doubtful debts decreases, it means the company is reducing its reserve for bad debts.
- As a result, the expense recorded on the income statement will be lower, which will increase net profit.
When a company provides for doubtful debts, it is setting aside a portion of its accounts receivable as a reserve to cover potential bad debts. This reserve is recorded as an expense on the company's income statement, which reduces its net profit. However, if the provision for doubtful debts decreases, it means that the company is reducing its reserve for bad debts. As a result, its net profit will increase because the expense recorded on the income statement will be lower.
Therefore, the correct answer is D) Increase in net profit.
To summarize:
- Provision for doubtful debts is a reserve set aside to cover potential bad debts.
- It is recorded as an expense on the income statement, which reduces net profit.
- If the provision for doubtful debts decreases, it means the company is reducing its reserve for bad debts.
- As a result, the expense recorded on the income statement will be lower, which will increase net profit.
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Community Answer
A decrease in the provision for doubtful debts would result in _____a)...
Provision for doubtful debts is made out of profit and is subtracted from the net profit. so decrease in provision for doubtful debt would increase the net profit.
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A decrease in the provision for doubtful debts would result in _____a)Increase in liabilityb)Decrease in liabilityc)Decrease in net profitd)Increase in net profitCorrect answer is option 'D'. Can you explain this answer?
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