Chapter 4; Accruals and Prepayments
Unearned revenue is treated as:
a) Liability in balance sheet b) Asset in balance sheet
c) Income in income statement d) Both a and c
Which of the following statement(s) is/are correct?
(i) Early recording of expenses overstate current year’s profit and late recording of
expenses will understate the current year’s profit.
(ii) Early recording of revenues overstate current year’s profit and early recording of
expenses will understate the current year’s profit.
a) Only (i) is correct b) Only (ii) is correct
c) Both are correct d) None is correct
Earned but not yet received income is treated as:
a) Asset b) Liability
c) Capital d) Loss
Adjustment of accrued expense has effect:
(i) On Statement of comprehensive income
(ii) On Statement of financial position
a) Only (i) is correct b) Only (ii) is correct
c) Both are correct d) None is correct
Which of the following statement(s) is/are correct?
(i) Prepaid expenses are assets
(ii) Prepayments are recorded in SOFP as well as in SOCI
a) Only (i) is correct b) Only (ii) is correct
c) Both are correct d) None is correct
Which of the following statement(s) is/are correct?
(i) Prepaid expenses are assets
(ii) Prepayments are recorded in SOFP as well as in SOCI
a) Only (i) is correct b) Only (ii) is correct
c) Both are correct d) None is correct
Which of the following entries are correct for unpaid salary worker?
(i) Debit: Expenses Credit: payables
(ii) Debit: Accrued Expenses Credit: payables
a) Only (i) is correct b) Only (ii) is correct
c) Both are correct d) None is correct
Which of the following is not true?
a) An accrual is an amount owing at the end of a period, a prepayment is an
amount paid in advance
b) An accrual is a liability, and prepayment is an asset
c) An accrual is a liability, and prepayment is always a non-current asset
d) An accrual is a current-liability and a prepayment is a current asset
Mr. Dawood determines at year end that salaries paid during the year include Rs
10,000 in advance.
What is the correct year end adjustment for advance salary to be made?
a) Dr. Salaries 10,000 b) Dr. Salaries 10,000
Cr. Advance Salaries 10,000 Cr. Accrued Salaries 10,000
c) Dr. Advance Salaries 10,000 d) None of these
Cr. Salaries expense 10,000
The accounting concept which implies that Payables and purchases are recorded at
cost if we avail cash discount is:
a) Accrual b) Prudence
c) Reliability d) Consistency
Which of the following entry should be made at year-end for accrued expenses?
a) Debit: Expenses b) Debit: Accrued expenses
Credit: Accrued expenses Credit: Expenses
c) Debit: prepaid expenses d) Debit: Expenses
Credit: expenses Credit: prepaid expenses
A business pays weekly salary of Rs. 20,000 on every Friday for working 5 days a
week. In current week year end is at Thursday what adjustment is needed in books?
a) Accrued expense Rs 16,000 b) Prepayment of Rs 16,000
c) Accrued expense Rs 4,000 d) Prepayment of Rs 4,000
Which of the following reversal entry should be made at start of next year for accrued
expenses?
a) Debit: Expenses b) Debit: Accrued expenses
Credit: Accrued expenses Credit: Expenses
c) Debit: prepaid expenses d) Debit: Expenses
Credit: expenses Credit: prepaid expenses
Which of the following entry should be made at year-end for prepaid expenses?
a) Debit: Expenses b) Debit: Accrued expenses
Credit: Accrued expenses Credit: Expenses
c) Debit: prepaid expenses d) Debit: Expenses
Credit: expenses Credit: prepaid expenses
Which of the following reversal entry should be made at start of next year for prepaid
expenses?
a) Debit: Expenses b) Debit: Accrued expenses
Credit: Accrued expenses Credit: Expenses
c) Debit: prepaid expenses d) Debit: Expenses
Credit: expenses Credit: prepaid expenses
Why is it necessary to account for accrued expenses?
a) So that current liabilities are not b) So that current assets are not
overstated understated
c) So that profit is not understated d) So that profit is not overstated
In the year to 31 December 2022, Saira received Rs. 50,800 rental income. The
amounts of rent received in advance and due in arrears were as follows:
31 Dec 2022 31 Dec 2021
Rs. Rs.
Rent received in advance 4,000 3,000
Rent due in arrears (accrued) 2,500 1,700
What figure for rental income should be recorded in the statement of profit or loss for
the year ended 31 December 2022?
a) Rs. 50,800 b) Rs. 50,600
c) Rs. 54,500 d) Rs. 56,000
Total rent of Rs. 150,000 were received during the year ended 31 December 2023. In
this respect opening and closing balances are as under:
31 Dec 2023 31 Dec 2022
Rs. Rs.
Rent received in advance (unearned) 16,000 10,000
Rent due in arrears (accrued/ rent receivable) 13,000 17,000
What figure for rental income should be recorded in the statement of profit or loss
for the year ended 31 December 2023?
a) Rs. 144,000 b) Rs. 140,000
c) Rs. 152,000 d) Rs. 156,000
ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December
in respect of office rent for the following year.
ABC Ltd. has an accounting year end of 31st December. What accounting entry is
to be passed in this year?
a) Cash (debit) = Rs.1 million and Advance rent – liability (credit) = Rs.1 million
b) Cash (debit) = Rs.1 million and Accrued rent (credit) = Rs.1 million
c) Cash (debit) = Rs.1 million and Rent income (credit) = Rs.1 million
d) None
Accrual for Receiver is Prepayment for Payer
a) True b) False
What is the effect on profit for the year and net assets when accrued income is not
recorded?
Profit for the year Assets
a) Overstated Overstated
b) Overstated Understated
c) Understated Overstated
d) Understated Understated
How would these assets will expire?
Prepaid rent Office supplies
(a) Through use and consumption With the passage of time
(b) Through use and consumption Trough use and consumption
(c) With the passage of time Through use and consumption
(d) With the passage of time With the passage of time
Consider the following statement:
i. Higher closing prepaid balances than previous year means that payment for the
year exceeds the expense for the year
ii. Higher closing accrued income balances means that receipt for the year
exceeds the income for the year.
Which of the following is/ are correct?
a) None is correct b) Only 1 is correct
c) Only 2 is correct d) Both are correct
On 1 February 2019 a loan of Rs 6,000,000 was taken from a bank for acquisition of
an office building. A portion of the building was rented out on 1 August 2019 at a
monthly rent of Rs 45,000. Interest is payable at 15% per annum on 31 January each
year and rent are received half yearly in advance.
What amounts of interest payable and unearned rent should be shown in statement
of financial income as on31 December 2019?
a) Interest payable Rs 900,000, b) Interest payable Rs 450,000,
unearned rent Rs 270,000 unearned rent Rs 45,000
c) Interest payable Rs 825,000, d) Interest payable Rs 825,000,
unearned rent Rs 45,000 unearned rent Rs 250,000
An entity received electricity bill for the month of June 20. The bill will be paid on 10
July 20. The entity financial year ends on 30 June. How would the payment be
recorded?
a) Debit utilities payable and credit b) Debit utilities payable and
electricity expense credit cash
c) Debit electricity expense and credit d) Debit electricity expense and
utilities payable credit cash
On 1-7-19 a business acquired a shop on rent which is payable quarterly in advance.
Payments are, made as follow:
Date Rupees
1 July 2019 75,000
30 September 2019 75,000
31 December 2019 75,000
31 March 2020 75,000
30 June 2020 75,000
Which will be the rent expense charged to P/L for the year ended 31-08-20
a) Rs 75,000 b) Rs 375,000
c) Rs 300,000 d) Rs 225,000
On 1 may 2022, an entity hired a firm at an annual fee of Rs 150,000 for maintaining
accounting records. On 1 may 2023 the contract was renewed for further one year at
a revised annual fee of Rs 210,000. The fee is paid quarterly in arrears on 31 July, 31
October, 31 January and 30 April each year. What figure should appear for fee in in
the financial statements for the year ended 31 December 2023?
Statement of Financial Position Statement of Profit or loss
a) Prepaid of Rs 35,000 Expense of Rs 190,000
b) Prepaid of Rs 17,500 Expense of Rs 180,000
c) Accrual of Rs 35,000 Expense of Rs 190,000
d) Accrual of Rs 17,500 Expense of Rs 180,000
On 1 July 2022 a business acquired a shop on rent which is payable quarterly in
advance. Payments of rent were made as follows:
Date Rupees
1 July 2022 75,000
30 September 2022 75,000
31 December 2022 75,000
31 March 2023 75,000
30 June 2023 75,000
What will be the rent expense charged to statement of profit or loss for the year ended
31 August 2023?
a) Rs. 375,000 b) Rs. 300,000
c) Rs. 75,000 d) Rs. 225,000
On 1 February 2023, a loan of Rs. 6,000,000 was taken from a bank for acquisition of
an office building. A portion of the building was rented out on 1 August 2023 at a
monthly rent of Rs. 45,000. Interest is payable at 15% per annum on 31 January each
year and rent is received half yearly in advance.
What amounts of interest payable and unearned rent should be shown in the
statement of financial position as on 31 December 2023?
a) Interest payable Rs. 900,000; b) Interest payable Rs. 825,000;
Unearned rent Rs. 270,000 Unearned rent Rs. 45,000
c) Interest payable Rs. 450,000; d) Interest payable Rs. 825,000;
Unearned rent Rs. 45,000 Unearned rent Rs. 250,000
Which of the following statement(s) is/are correct?
(I) Higher closing prepaid balance than previous year means that payment for the
year exceeds the expense for the year.
(II) Higher closing accrued income balance than previous year means that receipt
for the year exceeds the income for the year.
a) Only (I) is correct b) Only (II) is correct
c) Both are correct d) None is correct
Rent amounts totalling Rs. 150,000 were received during the year ended 31
December 2023. In this respect, opening and closing balances are as under:
31 Dec 2023 31 Dec 2022
----------- Rupees -----------
Unearned rent 16,000 10,000
Rent receivable 13,000 17,000
What should be the rent income for the year ended 31 December 2023?
a) Rs. 144,000 b) Rs. 152,000
c) Rs. 148,000 d) Rs. 140,000
An entity received electricity bill for the month of June 2023. The bill will be paid on 10
July 2023. The entity's financial year ends on 30 June. How would the payment be
recorded?
a) Debit electricity expense and b) Debit utilities payable and credit
credit utilities payable electricity expense
c) Debit utilities payable and credit d) Debit electricity expense and
cash credit cash
how will these assets expire?
Prepaid rent Office supplies
(a) With the passage of time Through use and consumption
(b) Through use and consumption with the passage of time
(c) With the passage of time with the passage of time
(d) Through use and consumption Through use and consumption
An unearned revenue in the books of a receiver is likely to be
a) a prepaid expense in the books b) a prepaid expense in the books of
of the payer the payer
c) an accrued expense in the books d) an accrued revenue in the books
of the payer of the payer
Matching (Accrual) principal:
a) Determine whether an item is an asset or liability.
b) Addresses the relationship b/w the accounting database and the balance
sheet (SOFP).
c) Requires that the account of assets equals the amount of liabilities in the
balance sheet.
d) Determines that expenses related to revenue are to be reported in the
period when the revenue is recognised.
The matching concept matches
a) assets with liabilities b) income with expenses
c) capital with reserves d) expenses with capital
Accrual basis of accounting records revenue when they are
a) Collected b) Earned
c) Contracted d) Readily available for use
Which of the following statement(s) is/are correct?
(I) Higher closing prepaid balance than previous year means that payment for
the year exceeds the expense for the year.
(II) Higher closing accrued income balance than previous year means that receipt
for the year exceeds the income for the year.
a) Only (I) is correct b) Only (II) is correct
c) Both are correct d) None is correct
Accrual concept does not apply in which TWO of the following?
a) Understate assets b) Overstate assets
c) Understate liabilities d) Overstate liabilities
Which of the following is correct?
(I) An accrual is expense relating to next year but paid in current year.
(II) A prepaid is an expense relating to current year but not paid in current year.
a) Only I b) Only II
c) Both are correct d) Both incorrect.
If one asset is decreased, then which of the following might be increased?
a) Income b) Liability
c) Capital d) Expense
If one asset is decreased, then which of the following might be increased?
a) Asset b) Liability
c) Expense d) Both a and c
The matching concept matches:
a) assets with liabilities b) income with expenses
c) capital with reserves d) expenses with capital
What are Outstanding Expenses?
a) Expenses which are paid off in the b) The necessary purchases that keep a
current balance sheet but not incurred. business going from day-to-day.
c) Type of expense that is due but has d) None of the above
not been paid.
A process of accounting that recognizes the impact of transactions on the financial
statements in the time periods when revenues and expenses occur instead of when
cash is received or disbursed is called basis
a) Accrual b) Cash
c) a & b d) None
A process of accounting where revenue and expense recognition would occur when
cash is received and disbursed is called
a) Cash b) Accrual
c) a & b d) None
Advance payments are recognized as
a) Receivable b) payable
c) bad debt d) none of these
[Link], a property company, received cash totalling Rs. 838,600 from tenants
during the year ended 31 December 2022. Figures for rent in advance and in arrears
at the beginning and at the end of year were:
31 December 2021 31 December 2022
Rent receive in advance 102,600 88,700
Rent in Arrears (all subsequently received) 42,300 48,400
What amount should appear in company’s Statement of P&L for the year ended 31
December 2012 for rental income?
a) Rs. 818,600 b) Rs. 738,000
c) Rs. 939,200 d) Rs. 858,600
On year-end a shop owner has electricity bills of Rs. 27,000. During the year electricity
bills paid are Rs. 220,000. What adjustment will be required to utilize expense account
regarding the outstanding bills?
a) Rs. 27,000 Cr b) Rs. 220,000 Cr
c) Rs. 27,000 Dr d) None of these.
Which of the following have same effect on the accounting equation as Depreciation?
a) Unearned income b) Accrued expense
c) Prepaid expense d) Accrued income
Unearned income is treated as
a) Liability in Balance sheet b) Asset in (SOCI)
(SOFP).
c) Contra Asset d) Liability in SOCI.
At the start of the year i.e. .1 October 2021, accrued rent was 120,000. The annual
rent was 720,000.
Payments have been made at following dates
1 October 2021 390,000
1 February 2022 300,000
1 June 2022 360,000
What will be the amount of prepaid or accrued rent at the end of the year i.e. 31
September 2022.
a) Prepaid rent Rs. 210,000 b) Accrued rent Rs. 210,000
c) Prepaid rent Rs. 360,000 d) None of these
On 1 January 2020, an entity rents out part of its premises to a tenant for Rs. 64,000
per month. As per agreement, rent is increased by 5% from start of each year.
Payments totaling Rs. 736,000 were received from tenant during the year 2021
including rent for December 2020. Which figure should be reported in the entity’s
financial statements at 31 December 2021?
Income statement Current assets
a) Rs. 806,400 Rs 67,200
b) Rs. 803,200 Rs 128,000
c) Rs. 803,200 Rs 67,200
d) Rs. 806,400 Rs 134,400
An unearned revenue in the books of a receiver is likely to be
a) A prepaid expense in the books b) An unearned revenue in the books
of the payer of the payer
c) An accrued expense in the books d) An accrued revenue in the books
of the payer of the payer
Asset may be overstated by removing (omitting) which TWO of the following
adjustments?
a) Expired insurance b) Depreciation
c) Unearned revenue d) Accrued salaries
Why is it necessary to account for accrued expenses?
Select the most appropriate answer:
a) So that current liabilities are not b) So that current assets are not
overstated. understated
c) So that profit is not understated d) So that profit is not overstated
Which of the following is correct?
1. Prepaid Expenses are always recorded as expenses when Goods and Services
are in used.
2. Accrued Expenses leads to increase in balance of expenses in Income Statement
even when payment is not yet made.
a) Only 1 b) Only 2
c) Both are correct d) None is correct
Mr. Yousuf a tenant pays annual rent of Rs. 120,000. Payment is made quarterly in
advance on 1 January, 1 April, 1 July, 1 October. Which of the following should be
included in his accounts for the year ended 31 October 2022?
a) Rs. 20,000 prepayment. b) Rs 20,000 accrual
c) Rs 10,000 prepayment. d) Rs 10,000 accrual
Expenses are recorded when they are incurred according to concept.
a) Prudence Concept b) matching concept
c) business entity concept d) all of these
according to which concept, we should record expense when we incur:
a) Materiality concept. b) matching concept
c) business entity concept d) cash basis