ACCA Applied Knowledge · Financial Accounting · Receivables and payables
At 31 December 20X4, Orion Co has trade receivables of $80,000 and an opening allowance for receivables of $3,000. Management decides the closing allowance should be 5% of receivables. What is the effect on profit or loss for the year?
Profit or loss bears an extra expense of $1,000. The required closing allowance is $4,000 (5% of $80,000) and the existing allowance is $3,000, so only the increase is charged to profit or loss.
- AIncrease in expense of $1,000Correct
- BDecrease in expense of $1,000
- CExpense of $4,000
- DExpense of $3,000
Explanation
Closing allowance is 5% x $80,000 = $4,000. The opening allowance was $3,000, so the allowance rises by $1,000, and this increase is charged to profit or loss. Charging $4,000 would ignore the opening balance.
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