Omitted provision adjustment overstates profit and retained earnings

Steps:

• Opening provision balance on 1 April 2022: $6,200 (credit).
• Required provision balance on 31 March 2023: $7,400 (credit).
• Required adjustment: increase provision by $7,400 -$6,200 = $1,200 (debit bad debt expense, credit provision).
• Adjustment not made: bad debt expense omitted, so profit for the year ending 31 March 2023 overstated by $1,200.
• Retained earnings (cumulative profits) thus overstated by $1,200 on 31 March 2023 statement of financial position.

Why B is correct:

• Under accrual accounting, increasing the provision records an expense that reduces net profit and retained earnings; omitting it overstates them by the adjustment amount ($1,200).

Why the others are wrong:

• A. $200 miscalculates the required increase ($1,200).
• C. Error omits expense, causing overstatement, not understatement.
• D. $7,400 is the total required provision balance, irrelevant to retained earnings impact.

Final answer: B