Question

What could happen if credit balances aren't distinguished from debit balances in accounts receivable? Which of the following scenarios is a likely consequence?

A) Overstating the actual amount of money owed by customers.
B) Understating the total revenue earned by the business.
C) Inaccurate assessment of bad debts.
D) Difficulty in reconciling cash flow statements with accounts receivable records.

Answer 1

Not distinguishing credit from debit balances in accounts receivable can lead to overstating money owed by customers, causing inaccuracies in financial statements and difficulties in reconciling cash flow statements with accounts receivable records.A) Overstating the actual amount of money owed by customers.

Step-by-step explanation:

If credit balances are not distinguished from debit balances in accounts receivable, it could result in overstating the actual amount of money owed by customers. This is because credit balances generally indicate that a customer has overpaid or a refund is due to them, and if these are not accounted for separately, the total amount of accounts receivable will appear higher than it actually is. Hence, not distinguishing between these balances would most likely lead to overstating the assets on the balance sheet and could potentially mislead stakeholders about the financial position of the business.

A misrepresentation of accounts receivable will also give rise to complications during the reconciliation process and may cause difficulties in reconciling the cash flow statements with the accounts receivable records. Additionally, if not properly managed, there could be an inaccurate assessment of bad debts, which negatively impacts financial forecasting and risk management.