A sole trader receives Rs. 30,000 from a customer who previously bought goods on credit. What is the effect on the financial statements?
Correct answer: A. Cash increases and receivables decrease
- A. Cash increases and receivables decrease
- B. Cash increases and sales revenue increases
- C. Receivables increase and cash decreases
- D. Profit increases by Rs. 30,000
Explanation
The receipt converts an amount due from the customer into cash, so cash rises and trade receivables fall by Rs. 30,000. The sale was recognised when the credit sale occurred, so this later receipt does not create additional profit.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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