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Difficulty: MediumAccounting Concepts and Conventions

A business entity received an electricity bill of ₦45,000\text{₦}45,000 in December 2025 for power consumed during that month. The accountant omitted this expense from the financial statements for the year ended 31st December 2025 because the bill was paid in February 2026. Which accounting concept or convention has been violated by the accountant?

  1. Accrual conceptAnswer
  2. B
    Business entity concept
  3. C
    Going concern concept
  4. D
    Historical cost concept

Answer

Accrual concept
The accrual concept requires expenses incurred during an accounting period to be matched against revenues of that same period, irrespective of when cash payment is made. Omitting an unpaid utility bill incurred before year-end directly breaches this concept.

Step-by-Step Solution

1
Identify the nature of the transaction and the timing of resource consumption versus cash payment
The electricity service was consumed during December 2025, but the cash settlement took place in February 2026.
Determining when the economic activity occurred is essential for identifying the correct reporting period.
2
Apply the relevant accounting principle governing income and expense recognition timing
Under the accrual concept, expenses must be recognized in the financial statements of the period in which they are incurred.
Failing to record incurred liabilities and expenses until cash is disbursed violates accrual accounting rules.

Key Concept

Accrual / Matching Concept
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Topics

Accounting Concepts and Conventions

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