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Difficulty: HardAccrued and Prepaid Expenses

At 1 January 2025, a trader's Rates Account had a prepaid balance of ₦35,000\text{₦}35,000. During the financial year ended 31 December 2025, total cash paid for rates was ₦210,000\text{₦}210,000, which included ₦45,000\text{₦}45,000 paid for rates covering the first quarter of 2026. As of 31 December 2025, an amount of ₦15,000\text{₦}15,000 for rates owing for December 2025 had not been paid. What is the net rates expense to be debited to the Profit and Loss Account for the year ended 31 December 2025?

Answer: 215000 ₦

Answer

The total rates expense to be debited to the Profit and Loss Account for the year ended 31 December 2025 is ₦215,000.
According to the matching concept, the Profit and Loss Account must reflect only expenses incurred for the specific period. Starting with cash paid (₦210,000), adding the opening prepaid balance (₦35,000) and closing accrued balance (₦15,000), and deducting the closing prepaid balance (₦45,000) yields ₦215,000 as the true expense for 2025.

Step-by-Step Solution

1
Record total cash paid during the current financial year
Cash paid = ₦210,000
This is the base amount paid through the cash book for rates.
2
Add the opening prepaid expense balance
₦210,000 + ₦35,000 = ₦245,000
Prepayments from the previous period relate to consumption in the current period.
3
Deduct the closing prepaid expense balance
₦245,000 - ₦45,000 = ₦200,000
Prepayments made at the end of the year relate to the subsequent accounting period.
4
Add the closing accrued expense balance
₦200,000 + ₦15,000 = ₦215,000
Accrued expenses incurred in the current period must be included under the matching/accrual concept even if unpaid.

Key Concept

Accrual and matching concept applied to expense accounts
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Topics

Accrued and Prepaid Expenses

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