Examkin

Question

Difficulty: MediumAdjustments for Accrued and Prepaid Expenses and Incomes

A sole trader paid N640,000\text{N}640,000 for advertising during the year ended 31 December 2025. On 1 January 2025, advertising paid in advance was N50,000\text{N}50,000. At the end of the financial year on 31 December 2025, accrued advertising amounted to N75,000\text{N}75,000, while prepaid advertising was N30,000\text{N}30,000. What is the total advertising expense to be charged to the Profit and Loss Account for the year ended 31 December 2025?

Answer: 735000 Naira

Answer

The total advertising expense to be charged to the Profit and Loss Account for the year ended 31 December 2025 is N735,000\text{N}735,000.
According to the accrual concept of accounting, revenue and expenses are recognized in the period to which they relate, not necessarily when cash is received or paid. The formula to calculate the expense charged to the Profit and Loss Account is: Cash Paid + Opening Prepayments - Opening Accruals + Closing Accruals - Closing Prepayments. Substituting the given values gives 640,000+50,000+75,000−30,000=N735,000640,000 + 50,000 + 75,000 - 30,000 = \text{N}735,000.

Step-by-Step Solution

1
Record total cash paid during the financial period
Cash paid = N640,000\text{N}640,000
This is the base cash disbursement for advertising in 2025.
2
Add opening prepayment from 1 January 2025
Adjusted subtotal = 640,000+50,000=N690,000640,000 + 50,000 = \text{N}690,000
Prepayments made in the previous year belong to the current year's expense under the accrual principle.
3
Add closing accrual on 31 December 2025
Adjusted subtotal = 690,000+75,000=N765,000690,000 + 75,000 = \text{N}765,000
Accrued expenses incurred during the current financial year must be recognized regardless of whether payment has occurred.
4
Subtract closing prepayment on 31 December 2025
Final Profit and Loss Charge = 765,000−30,000=N735,000765,000 - 30,000 = \text{N}735,000
Prepayments made in the current year cover the subsequent financial period and must be excluded from the current year's Profit and Loss Account.

Key Concept

Adjustments for opening/closing accruals and prepayments to determine the accurate period expense under accrual accounting.
Rate this question

Topics

Adjustments for Accrued and Prepaid Expenses and Incomes

More questions from this topic