Office equipment costing £3,000 was debited to the purchases account. What is the effect of correcting this error on the profit for the year, ignoring depreciation?
Answer and explanation
Correct answer: D. Profit increases by £3,000
- Step 1: Purchases forms part of cost of sales and so reduces profit.
- Step 2: Moving £3,000 from purchases to an asset account removes that expense.
- Step 3: Profit therefore rises by £3,000.
Answer
Profit increases by £3,000.
Why not the others: Profit would fall only if £3,000 were added to expenses. Profit changes because an expense account is affected, even though the debit stays a debit. The adjustment is £3,000 once; it is not doubled, since only one side moves out of the expense.
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