A cheque for Rs. 500 received from Yuvraj & Co. was dishonoured and debited to discount Account. Due to rectification of this error, net profit will :a)Decrease by Rs. 1,000b)Increase by Rs. 500c)Increase by Rs. 1,000d)No changeCorrect answer is option 'B'. Can you explain this answer?

Question

Answer

A

Answer

Dear Yuvraj,

I am writing to acknowledge the receipt of the cheque for Rs. 500 that you sent me. Thank you for your prompt payment.

I appreciate your reliability and trustworthiness, and I look forward to doing business with you in the future.

If you have any questions or concerns, please don't hesitate to contact me.

Thanks once again for your payment.

Sincerely,

[Your Name]

Answer

B

Answer

When a cheque for Rs. 500 received from Yuvraj & Co. was dishonoured, it was incorrectly debited to the Discount Account. Typically, a Discount Account records reductions in revenue, not expenses or losses from non-payment.

Rectification: The proper accounting treatment for a dishonoured cheque should move the erroneous debit from the Discount Account to the correct account, typically Accounts Receivable or a similar account for bad debts. This shift does not involve real income; it corrects the way the income was recorded.

Impact on Net Profit: Correcting this by removing the debit from the Discount Account means the discounts given are effectively increased by Rs. 500 (or reducing the incorrect reduction in expenses that never should have been recorded as such). Therefore, it looks as if we're reversing an incorrect expense reduction, which will appear as if net profit increases by Rs. 500 because the initially recorded 'expense' from the Discount Account was erroneous.

So, when corrected, it appears as if the company's income statement was relieved of an improper Rs. 500 reduction, thus increasing net profit. Hence, Answer B: Increase by Rs. 500 is selected as the correction results in a reversal of a debit that should not have been in Discount but should have reflected an uncollected income or a receivable.

Similar CA Foundation Doubts

After rectification of the following errors, effect on Net profit will bei) A cheque dishonoured Rs.3,100 debited to discount A/cii) Sales book (undercast) short by Rs.23,000iii) A customer returned goods of value of Rs.1,200, included in stock but not recorded

a cheque for rs 200 received from yuvraj and company was dishonored and debited to discount account pass rectification entry Related: Rectification of Errors?

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