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Difficulty: EasyAccrued and Prepaid Income

During the financial year ended 31 December 2025, a business received ₦85,000₦85,000 cash as interest on investments. At the end of the year, ₦10,000₦10,000 of this amount was determined to be received in advance for the following financial year. What is the amount of interest income to be credited to the Profit and Loss Account for the year?

  1. ₦75,000₦75,000Answer
  2. B
    ₦95,000₦95,000
  3. C
    ₦85,000₦85,000
  4. D
    ₦10,000₦10,000

Answer

₦75,000₦75,000
Under the accrual concept of accounting, only income earned in the current financial period should be credited to the Profit and Loss Account. Since ₦10,000₦10,000 of the ₦85,000₦85,000 cash received relates to the next period, it must be subtracted to leave ₦75,000₦75,000 as the earned income for the year.

Step-by-Step Solution

1
Identify total cash received for interest during the period
Total cash received = ₦85,000₦85,000
This represents the starting cash movement for interest income.
2
Deduct closing prepaid income (received in advance)
Earned Interest Income = ₦85,000−₦10,000=₦75,000₦85,000 - ₦10,000 = ₦75,000
According to the accrual concept, revenue received in advance for future periods must be excluded from the current year's Profit and Loss Account.

Key Concept

Adjustment for Prepaid Income in the Profit and Loss Account
Estimated Time:45s
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Topics

Accrued and Prepaid Income

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