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

The answer to the question is: A. decrease in net profit

An increase in provision for doubtful debts would result in decrease in net profit.

When a company increases its provision for doubtful debts, it is recognizing that some of its accounts receivable may not be collected. This provision is an estimate of the amount of receivables that may ultimately prove to be uncollectible. When the provision for doubtful debts is increased, it represents an additional expense for the company, which reduces its net profit. The increase in provision for doubtful debts reflects a more conservative approach to accounting for potential bad debts, and it reduces the company’s reported profitability.

The provision for doubtful debts is a contra-asset account that is deducted from the total accounts receivable on the balance sheet. By increasing this provision, the company acknowledges that a portion of its accounts receivable may not be collected, and it adjusts its financial statements accordingly. This adjustment reduces the net profit because it reflects a more accurate representation of the company’s financial position, taking into account the possibility of bad debts.

In summary, an increase in provision for doubtful debts would result in a decrease in net profit because it represents an additional expense for the company, reflecting a more conservative approach to accounting for potential bad debts.