Trade receivables are Rs 500,000, and the required allowance for doubtful debts is 5%. An existing allowance has a credit balance of Rs 15,000. What adjustment is required?
Correct answer: A. Debit expense Rs 10,000 and credit allowance Rs 10,000
- A. Debit expense Rs 10,000 and credit allowance Rs 10,000
- B. Debit expense Rs 25,000 and credit allowance Rs 25,000
- C. Debit allowance Rs 10,000 and credit expense Rs 10,000
- D. Debit receivables Rs 10,000 and credit allowance Rs 10,000
Explanation
The required allowance is 5% of Rs 500,000, or Rs 25,000. Since Rs 15,000 already exists, only the Rs 10,000 increase is charged as expense and credited to the allowance account.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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