Which of the following is the effect of an increase in the provision for discount allowed?
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Correct Answer: Option C
Explanation:
The provision for discount allowed represents an estimated amount a business expects to provide as discounts to its customers. This provision is a contra-revenue item, meaning it reduces the overall revenue or profit of the business.
How it works:
When a business increases the provision for discount allowed, it means that more of the business's expected revenue is being allocated to discounts, which will reduce the net profit.
The discount allowed typically affects net profit because it reduces the total sales revenue the business recognizes after accounting for the discount.
Why does it decrease net profit?
Net profit is calculated after considering all expenses, including indirect expenses and provisions like discounts. If the provision for discount allowed is increased, it essentially reduces the recognized revenue (since more discounts are expected to be given), thereby lowering the net profit.
The provision for discount allowed represents an estimated amount a business expects to provide as discounts to its customers. This provision is a contra-revenue item, meaning it reduces the overall revenue or profit of the business.
How it works:
When a business increases the provision for discount allowed, it means that more of the business's expected revenue is being allocated to discounts, which will reduce the net profit.
The discount allowed typically affects net profit because it reduces the total sales revenue the business recognizes after accounting for the discount.
Why does it decrease net profit?
Net profit is calculated after considering all expenses, including indirect expenses and provisions like discounts. If the provision for discount allowed is increased, it essentially reduces the recognized revenue (since more discounts are expected to be given), thereby lowering the net profit.