Increasing Provision for Doubtful Debts Reduces Profit and Net Assets

Steps:

• Recognize that increasing the provision records additional bad debt expense in the income statement.
• This expense reduces net profit for the year.
• The provision is a contra-asset account deducted from trade receivables.
• Increasing it lowers the net book value of current assets on the statement of financial position.

Why C is correct:

• Per accrual accounting, the provision adjustment increases expenses (bad debt expense) and decreases current assets (net receivables), as defined in IAS 39/IFRS 9 for impairment.

Why the others are wrong:

• A: Expenses increase (not decrease), and current assets decrease (not increase).
• B: Expenses increase (not decrease), and it affects assets (not liabilities).
• D: Expenses increase, but it decreases current assets (not liabilities).

Final answer: C