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Difficulty: MediumAccrued and Prepaid Income

At 1 January 2025, a business had commission income accrued of ₦6,000₦6,000. During the year ended 31 December 2025, total cash received for commission was ₦85,000₦85,000. On 31 December 2025, commission accrued was ₦10,000₦10,000 while commission received in advance was ₦4,000₦4,000. What is the amount of commission income to be credited to the Profit and Loss Account for the year ended 31 December 2025?

  1. ₦89,000₦89,000Answer
  2. B
    ₦91,000₦91,000
  3. C
    ₦81,000₦81,000
  4. D
    ₦79,000₦79,000

Answer

The amount to be credited to the Profit and Loss Account for commission income is ���89,000���89,000.
To determine the true income belonging to the financial year under the accrual concept, start with total cash received (₦85,000₦85,000), deduct opening accrued income (₦6,000₦6,000) as it relates to the prior period, add closing accrued income (₦10,000₦10,000) earned in the current period, and deduct closing prepaid income (₦4,000₦4,000) received for the future period: ₦85,000−₦6,000+₦10,000−₦4,000=₦89,000₦85,000 - ₦6,000 + ₦10,000 - ₦4,000 = ₦89,000.

Step-by-Step Solution

1
Identify the base cash received for commission income during the accounting period.
Cash received = ₦85,000₦85,000.
Cash received represents the starting total cash inflow for the period.
2
Adjust for opening accrued income from the previous period.
Cash received less opening accrued = ₦85,000−₦6,000=₦79,000₦85,000 - ₦6,000 = ₦79,000.
Opening accrued income was earned in the previous year but received in the current year, so it must be excluded.
3
Add closing accrued income and subtract closing prepaid income.
Income credited to Profit and Loss Account = ₦79,000+₦10,000−₦4,000=₦89,000₦79,000 + ₦10,000 - ₦4,000 = ₦89,000.
Closing accrued income was earned in the current year and must be included, whereas closing prepaid income relates to the next financial year and must be deducted.

Key Concept

Accruals and prepayments adjustments for income accounts in final accounts
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Topics

Accrued and Prepaid Income

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