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Difficulty: MediumAccrued and Prepaid Expenses

The electricity account of Chukwuma Enterprises showed a trial balance debit balance of ₦240,000\text{₦}240,000 for the year ended 31 December 2025. At the beginning of the year on 1 January 2025, electricity accrued was ₦18,000\text{₦}18,000 and prepaid electricity was ₦12,000\text{₦}12,000. At the end of the year on 31 December 2025, electricity accrued was ₦25,000\text{₦}25,000 while prepaid electricity was ₦15,000\text{₦}15,000. What is the total electricity expense (in ₦) to be debited to the Profit and Loss Account for the year ended 31 December 2025?

Answer: 244000 ₦

Answer

The total electricity expense to be debited to the Profit and Loss Account is ₦244,000\text{₦}244,000.
Under accrual accounting, the expense charged for the period equals cash paid during the year plus opening prepayments minus opening accruals plus closing accruals minus closing prepayments: 240,000+12,000−18,000+25,000−15,000=₦244,000240,000 + 12,000 - 18,000 + 25,000 - 15,000 = \text{₦}244,000.

Step-by-Step Solution

1
Identify the total cash paid during the financial year.
Amount paid = ₦240,000\text{₦}240,000.
This is the starting cash outflow recorded in the trial balance.
2
Adjust for opening balances brought forward from the previous period.
Add opening prepayment of ₦12,000\text{₦}12,000 and subtract opening accrual of ₦18,000\text{₦}18,000.
Prepayments from the prior year belong to the current period's expense, whereas accruals from the prior year were already expensed in that period and paid in the current period.
3
Adjust for closing balances at the end of the current period.
Add closing accrual of ₦25,000\text{₦}25,000 and subtract closing prepayment of ₦15,000\text{₦}15,000.
Accrued expenses incurred in the current period must be added, and prepaid expenses paid for the next period must be deducted under accrual accounting concepts.
4
Calculate the net charge to the Profit and Loss Account.
240,000+12,000−18,000+25,000−15,000=₦244,000240,000 + 12,000 - 18,000 + 25,000 - 15,000 = \text{₦}244,000.
This represents the exact electricity expense incurred during the financial year 2025.

Key Concept

Accrual Accounting Adjustment for Expenses
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Topics

Accrued and Prepaid Expenses

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