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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

At the end of the year, rent for the last month remains unpaid. Which adjusting treatment is correct in the books of the tenant?

Outstanding rent is added to the rent expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet. The accrual principle requires the expense of the year to be recorded even though it has not yet been paid in cash.

  1. AAdd the amount to rent expense in the Profit and Loss Account and show it as a current liabilityCorrect
  2. BDeduct the amount from rent expense and show it as a current asset
  3. CIgnore it until paid in the next year
  4. DAdd it to rent expense and show it as an asset

Explanation

Under the accrual system, expense belongs to the year in which the benefit is used, whether paid or not. Unpaid rent is added to the rent expense and shown as outstanding rent, a current liability. Deducting it, as in option 2, is the treatment for prepaid expenses, not outstanding ones.

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