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Difficulty: MediumAccrued and Prepaid Expenses

On 1 January 2025, the Rent Account of a trader showed a prepaid balance of ₦15,000\text{₦}15,000 and an accrued balance of ₦20,000\text{₦}20,000. Total cash paid for rent during the year ended 31 December 2025 was ₦210,000\text{₦}210,000. At 31 December 2025, rent prepaid was ₦25,000\text{₦}25,000 while rent owing amounted to ₦35,000\text{₦}35,000. What is the amount of rent expense to be charged to the Profit and Loss Account for the year ended 31 December 2025?

  1. A
    ₦195,000\text{₦}195,000
  2. B
    ₦205,000\text{₦}205,000
  3. ₦215,000\text{₦}215,000Answer
  4. D
    ₦225,000\text{₦}225,000

Answer

The amount to be charged to the Profit and Loss Account for rent expense is ₦215,000\text{₦}215,000.
Under accrual accounting, the expense charged to the Profit and Loss Account reflects the actual expense incurred during the accounting period regardless of when cash is paid. Therefore, opening prepaid rent (₦15,000\text{₦}15,000) and closing accrued rent (₦35,000\text{₦}35,000) are added to the cash paid (₦210,000\text{₦}210,000), while opening accrued rent (₦20,000\text{₦}20,000) and closing prepaid rent (₦25,000\text{₦}25,000) are deducted, giving ₦215,000\text{₦}215,000.

Step-by-Step Solution

1
Identify the base cash payment made during the financial year.
Total cash paid = ₦210,000\text{₦}210,000
Cash paid forms the starting point for calculating the actual expense incurred for the year.
2
Adjust for opening balances at 1 January 2025.
Add Opening Prepaid (₦15,000\text{₦}15,000) and Subtract Opening Accrued (₦20,000\text{₦}20,000)
Prepaid rent brought forward belongs to the current year, whereas accrued rent brought forward relates to the previous year.
3
Adjust for closing balances at 31 December 2025.
Add Closing Accrued (₦35,000\text{₦}35,000) and Subtract Closing Prepaid (₦25,000\text{₦}25,000)
Accrued rent at year-end belongs to the current year's expense, whereas prepaid rent at year-end relates to the next financial year.
4
Calculate the net charge to the Profit and Loss Account.
₦210,000+₦15,000−₦20,000+₦35,000−₦25,000=₦215,000\text{₦}210,000 + \text{₦}15,000 - \text{₦}20,000 + \text{₦}35,000 - \text{₦}25,000 = \text{₦}215,000
Combining cash paid with accrual basis adjustments yields the true rental expense for the period.

Key Concept

Accruals and Prepayments Adjustment Formula for Expense Accounts
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Topics

Accrued and Prepaid Expenses

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