Skip to content

CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Principles, Concepts and Conventions

Anita Enterprises paid an insurance premium of Rs 24,000 on 1 October 2024 for 12 months. Its accounting year ends on 31 March 2025. Under the matching concept, what amount should be charged to the profit and loss account for the year, and what should be shown as prepaid?

Rs 12,000 is charged as expense and Rs 12,000 is shown as prepaid insurance. Six of the twelve months of cover fall in the year to 31 March 2025, so only half the premium is matched with that year's revenue; the rest relates to the next year.

  1. AExpense Rs 24,000; prepaid nil
  2. BExpense Rs 12,000; prepaid Rs 12,000Correct
  3. CExpense Rs 6,000; prepaid Rs 18,000
  4. DExpense Rs 18,000; prepaid Rs 6,000

Explanation

From 1 October 2024 to 31 March 2025 is 6 months. Expense = 24,000 x 6/12 = Rs 12,000, and the remaining 6 months give prepaid insurance of Rs 12,000. Charging the whole Rs 24,000 would ignore matching of cost with the period benefited.

Did you get it right without looking?

One question tells you little. A timed set on Accounting Principles, Concepts and Conventions shows your real accuracy, how long you take and where you lose marks.

Practise Accounting Principles, Concepts and ConventionsFree diagnostic mock

More Accounting Principles, Concepts and Conventions questions