Which of the following is the effect of an increase in the provision for discount allowed?

Assessment: WAEC SSCE - Financial Accounting - 2008 (Objective) Subject: Financial Accounting

Question 1 Report

Which of the following is the effect of an increase in the provision for discount allowed?
Answer Details
An increase in the provision for discount allowed will result in a decrease in net profit. The provision for discount allowed is an estimate of the discounts that a business will give to its customers for early payment or other reasons. When the provision for discount allowed is increased, it means that the business is expecting to give more discounts than it previously estimated. This will reduce the amount of revenue the business will earn, and thus reduce the net profit. Therefore, the correct option is (3) decrease in net profit.
Read lesson note on Miscellaneous Accounts (WAEC)
Read lesson note on Provisions And Reserves (WAEC)
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