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

At 31 December, a company has not yet received an electricity bill for the last quarter of the year. The estimated charge is $1,200. Which entry correctly records this at the year end?

Debit electricity expense and credit accruals for $1,200. The cost relates to the current year even though no bill has arrived, so the expense must be recognised and a current liability recorded in the statement of financial position.

ADebit Electricity expense $1,200; credit Accruals $1,200Correct
BDebit Prepayments $1,200; credit Electricity expense $1,200
CDebit Accruals $1,200; credit Electricity expense $1,200
DDebit Electricity expense $1,200; credit Prepayments $1,200

Explanation

The expense has been incurred but not yet recorded, so the expense is increased by a debit and a liability (accrual) is created by a credit. Reversing the entries (option C) would reduce the expense, and prepayment entries relate to costs paid in advance.

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