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Difficulty: MediumAccrued and Prepaid Expenses

During the financial year ended 31 December 2025, a business paid ₦95,000\text{₦}95,000 by cash for electricity expenses. At 1 January 2025, electricity prepaid was ₦12,500\text{₦}12,500 and electricity accrued was ₦8,000\text{₦}8,000. At 31 December 2025, electricity accrued was ₦14,000\text{₦}14,000 and electricity prepaid was ₦6,500\text{₦}6,500. Calculate the amount of electricity expense to be debited to the Profit and Loss Account for the year ended 31 December 2025.

Answer: 107000 ₦

Answer

The amount to be debited to the Profit and Loss Account as electricity expense for the year ended 31 December 2025 is ₦107,000.
According to the matching/accrual concept of accounting, revenue and expenses must be recognized in the period they occur regardless of when cash is paid. The formula for expense to be charged to Profit and Loss is: Cash Paid + Opening Prepayment - Opening Accrual + Closing Accrual - Closing Prepayment. Performing the calculation: ₦95,000 + ₦12,500 - ₦8,000 + ₦14,000 - ₦6,500 yields ₦107,000.

Step-by-Step Solution

1
Start with total cash paid during the year
₦95,000
This is the initial cash outlay recorded in the cash book and posted to the expense account.
2
Adjust for opening prepaid and accrued balances
₦95,000 + ₦12,500 - ₦8,000 = ₦99,500
Opening prepayment paid in the prior period relates to the current period and must be added. Opening accrual incurred in the prior period was unpaid and must be subtracted.
3
Adjust for closing accrued and prepaid balances
₦99,500 + ₦14,000 - ₦6,500 = ₦107,000
Closing accrual incurred in the current period must be added. Closing prepayment paid in the current period for the future period must be subtracted.

Key Concept

Accrual concept in calculating expense to be charged to Profit and Loss Account
Estimated Time:1m 30s
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Topics

Accrued and Prepaid Expenses

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