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Difficulty: MediumAccrued and Prepaid Expenses

On 1 January 2025, the Telephone Expense Account of a trading enterprise showed an accrued balance of ₦6,500\text{₦}6,500. During the year ended 31 December 2025, total cash paid for telephone bills was ₦92,000\text{₦}92,000. At 31 December 2025, telephone bills owing amounted to ₦9,000\text{₦}9,000, while prepaid telephone bills amounted to ₦4,500\text{₦}4,500. What amount should be charged to the Profit and Loss Account for telephone expense for the year ended 31 December 2025?

  1. A
    ₦85,000\text{₦}85,000
  2. ₦90,000\text{₦}90,000Answer
  3. C
    ₦94,000\text{₦}94,000
  4. D
    ₦103,000\text{₦}103,000

Answer

₦90,000\text{₦}90,000
Under the accrual concept of accounting, revenue and expenses are recognized in the period they occur regardless of cash flow. The telephone expense to be charged to the Profit and Loss Account is computed as: Cash Paid (₦92,000\text{₦}92,000) - Opening Accrual (₦6,500\text{₦}6,500) + Closing Accrual (₦9,000\text{₦}9,000) - Closing Prepayment (₦4,500\text{₦}4,500) = ₦90,000\text{₦}90,000.

Step-by-Step Solution

1
Identify the base cash payment for telephone expense during the year
Cash Paid = ₦92,000\text{₦}92,000
Cash payments form the starting point for calculating accrual-based expense.
2
Deduct opening accrued expense that relates to the previous financial period
₦92,000−₦6,500=₦85,500\text{₦}92,000 - \text{₦}6,500 = \text{₦}85,500
Opening accruals represent expenses of the prior year paid during the current year.
3
Add closing accrued expense and subtract closing prepaid expense
₦85,500+₦9,000−₦4,500=₦90,000\text{₦}85,500 + \text{₦}9,000 - \text{₦}4,500 = \text{₦}90,000
Closing accruals belong to the current year and must be included, while closing prepayments relate to the next period and must be excluded.

Key Concept

Accrual Accounting Adjustment for Operating Expenses
Estimated Time:1m 30s
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Topics

Accrued and Prepaid Expenses

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