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Difficulty: EasyAccrued and Prepaid Income

During the financial year ended 31 December 2025, a business received ₦120,000₦120,000 cash for rent. At the end of the year, ₦20,000₦20,000 of this amount represented rent received in advance for the following year. What amount should be credited to the Profit and Loss Account as rent income for the year?

  1. ₦100,000Answer
  2. B
    ₦140,000
  3. C
    ₦120,000
  4. D
    ₦20,000

Answer

₦100,000
Under the accrual/matching concept, only income earned for the current accounting year should be credited to the Profit and Loss Account. Rent received in advance (₦20,000₦20,000) belongs to the next financial period and must be deducted from the total cash received (₦120,000₦120,000), yielding ₦100,000₦100,000.

Step-by-Step Solution

1
Identify total cash received for rent during the accounting period
Cash received = ₦120,000₦120,000
This is the total amount recorded in the cash book for rent.
2
Deduct prepaid income (rent received in advance) at year-end
₦120,000−₦20,000=₦100,000₦120,000 - ₦20,000 = ₦100,000
According to the accrual concept, income received relating to future periods must be excluded from the current period's Profit and Loss Account.

Key Concept

Accounting for Prepaid Income in Final Accounts
Estimated Time:45s
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Topics

Accrued and Prepaid Income

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