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Difficulty: EasyAdjustments for Accrued and Prepaid Expenses and Incomes

A trader paid N85,000\text{N}85,000 for electricity during the financial year ended 31 December 2025. Additional records indicate that electricity worth N15,000\text{N}15,000 was owing at the end of the year. What amount should be charged to the Profit and Loss Account for electricity for the year?

Answer: 100000 Naira

Answer

The amount to be charged to the Profit and Loss Account for electricity is N100,000.
According to the accrual concept of accounting, net income for an accounting period must reflect all expenses incurred during that period regardless of whether payment has been made. The electricity consumed but unpaid at year-end (N15,000) must be added to the cash paid (N85,000), giving a total charge of N100,000 to the Profit and Loss Account.

Step-by-Step Solution

1
Identify cash paid for the expense during the accounting period
N85,000
This is the amount actually disbursed during the financial year.
2
Add the accrued expense at the end of the financial year
N85,000 + N15,000 = N100,000
Under the accruals concept, expenses incurred but not yet paid must be added to the cash paid to determine the true expense for the period.

Key Concept

Adjustment for Accrued Expenses
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Topics

Adjustments for Accrued and Prepaid Expenses and Incomes

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