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Difficulty: EasyBalance Sheet Classification of Assets and Liabilities

In the balance sheet of a sole trader, under which section should accrued expenses at the end of the accounting period be classified?

  1. Current liabilitiesAnswer
  2. B
    Current assets
  3. C
    Non-current liabilities
  4. D
    Additions to capital

Answer

Current liabilities
Accrued expenses are amounts owed by the firm for goods or services already received during the financial year. Since these obligations are short-term and payable within 12 months, they are classified under current liabilities in the balance sheet.

Step-by-Step Solution

1
Identify the nature of accrued expenses
Accrued expenses are expenses incurred during the accounting period but not yet paid for by the balance sheet date.
Understanding the definition of an accrual determines whether it is an asset, liability, or capital item.
2
Determine the time horizon for settlement
These expenses are expected to be paid within the next short-term operating cycle (less than 12 months).
Obligations due within one year are classified as current rather than non-current.
3
Classify the item under the appropriate balance sheet heading
Classify accrued expenses as current liabilities.
Current liabilities group together short-term debts and obligations owed by the entity.

Key Concept

Balance Sheet Classification of Current Liabilities
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Topics

Balance Sheet Classification of Assets and Liabilities