An increase in provision for doubtful debts would result in?

A. decrease in net profit
B. increase in net profit
C. decrease in gross profit
D. increase in gross profit

Correct Answer:

Option A – decrease in net profit

Explanation

Increase in provision for doubtful debt occurs when the current year’s provision for doubtful debts is more than the previous year’s provision. In the final account, increase in provision for doubtful debts is debited to profit and loss account but in the balance sheet, the increase is added to any previous provision and the total subtracted from the debtors balance. Therefore, it will reduce the net profit from the profit and loss account.