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Question

Difficulty: HardAccrued and Prepaid Expenses

On 1 January 2025, the Advertising Account of Folake & Co. showed a prepaid balance of ₦18,000\text{₦}18,000 and an accrued balance of ₦12,000\text{₦}12,000. During the year ended 31 December 2025, a total cash payment of ₦145,000\text{₦}145,000 was made for advertising. At the end of the financial year on 31 December 2025, advertising accrued was ₦25,000\text{₦}25,000 and advertising prepaid was ₦22,000\text{₦}22,000. What is the total amount to be charged to the Profit and Loss Account for advertising for the year ended 31 December 2025?

Answer: 154000 ₦

Answer

₦154,000
Under the accrual basis of accounting, expenses charged to the Profit and Loss Account must relate strictly to the current financial year. Adding the opening prepayment (₦18,000) and closing accrual (₦25,000) while deducting the opening accrual (₦12,000) and closing prepayment (₦22,000) from the cash paid (₦145,000) yields ₦154,000.

Step-by-Step Solution

1
Identify cash paid for advertising during the financial period
Total cash paid = ₦145,000
This represents the initial cash outflow before applying accrual adjustments.
2
Adjust for opening balances of prepayment and accrual
Net opening adjustment = +₦18,000 (prepaid) - ₦12,000 (accrued) = +₦6,000
Opening prepayment was paid in the previous period for the current year, whereas opening accrual represents previous period expenses settled out of this year's cash payments.
3
Adjust for closing balances of accrual and prepayment
Net closing adjustment = +₦25,000 (accrued) - ₦22,000 (prepaid) = +₦3,000
Closing accrual is an expense incurred in the current period but unpaid, while closing prepayment is a cash payment made for the upcoming period.
4
Compute net charge to Profit and Loss Account
Profit & Loss charge = ₦145,000 + ₦6,000 + ₦3,000 = ₦154,000
Summing the cash paid with all periodic adjustments applies the accrual basis of accounting to find the true expense for the financial year.

Key Concept

Accrual Accounting and Expense Adjustment
Estimated Time:2m 0s
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Topics

Accrued and Prepaid Expenses

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