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ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

At 30 June, Orwell Co's trial balance shows a rent expense of $15,000 for the year. It is then discovered that rent for the final month, $1,250, has not been recorded or paid. What is the correct adjusting journal entry?

Debit rent expense $1,250 and credit accruals $1,250. The rent for the final month was incurred in the year but is unpaid, so the expense must be recognised and a current liability recorded in the statement of financial position.

  1. ADebit Rent expense $1,250; credit Accruals $1,250Correct
  2. BDebit Prepayments $1,250; credit Rent expense $1,250
  3. CDebit Accruals $1,250; credit Rent expense $1,250
  4. DDebit Rent expense $1,250; credit Cash $1,250

Explanation

The cost has been incurred but not paid, so the expense increases (debit) and a liability is created (credit accruals). Option D is wrong as no cash has been paid.

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