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Difficulty: Very hardAdjustments for Accrued and Prepaid Expenses and Incomes

A sole trader extracted a trial balance on 31st December 2025 showing a total payment of N320,000\text{N}320,000 under the account heading 'Rent and Rates'.

Additional audit records reveal the following details:
1. The 'Rent and Rates' figure includes N60,000\text{N}60,000 paid specifically for rates.
2. On 1st January 2025, rent accrued brought forward was N25,000\text{N}25,000, and rent prepaid brought forward was N40,000\text{N}40,000.
3. On 31st December 2025, rent prepaid carried forward for the next financial year was N35,000\text{N}35,000, while rent accrued for 2025 was N30,000\text{N}30,000.

What is the net amount to be charged to the Profit and Loss Account for Rent Expense (excluding rates) for the year ended 31st December 2025?

Answer: 270000 Naira

Answer

The net amount to be charged to the Profit and Loss Account for Rent Expense for the year ended 31st December 2025 is 270,000 Naira.
Applying accrual concepts requires matching expenses to the period they are incurred regardless of cash timing. Rent paid in cash was 260,000 Naira (320,000 total less 60,000 rates). Subtracting opening accrued rent (25,000 Naira) and closing prepaid rent (35,000 Naira), while adding opening prepaid rent (40,000 Naira) and closing accrued rent (30,000 Naira), yields 270,000 Naira.

Step-by-Step Solution

1
Deduct rates paid from the total payment to isolate rent paid during the year
Rent paid during the year = 260,000 Naira
Rates are a separate expense category and must be excluded when determining rent expense.
2
Adjust for opening balances by subtracting opening accrued rent and adding opening prepaid rent
Adjusted rent after opening balances = 260,000 - 25,000 + 40,000 = 275,000 Naira
Opening accrued rent represents cash paid in 2025 for the prior period and must be subtracted, whereas opening prepaid rent represents cash paid previously for the current period and must be added.
3
Adjust for closing balances by subtracting closing prepaid rent and adding closing accrued rent
Final Rent Expense charged to Profit and Loss Account = 275,000 - 35,000 + 30,000 = 270,000 Naira
Closing prepaid rent covers the next financial year and must be removed, whereas closing accrued rent covers services consumed in 2025 that remain unpaid and must be added.

Key Concept

Adjusting cash paid for expenses using opening and closing accruals and prepayments under accrual accounting principles
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Topics

Adjustments for Accrued and Prepaid Expenses and Incomes

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