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

At the end of the year, Sharma Traders has not yet paid the salary of March, which belongs to the current year. In the year-end adjustment, this item is treated as:

Unpaid salary of the current year is an outstanding expense. It is added to salary expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet, because the benefit has been used but the payment is still due.

  1. AAn outstanding expense, shown as a liability in the Balance SheetCorrect
  2. BA prepaid expense, shown as an asset in the Balance Sheet
  3. CAn accrued income, shown as an asset in the Balance Sheet
  4. DIncome received in advance, shown as a liability in the Balance Sheet

Explanation

Salary of March relates to the current year but is unpaid, so it is an expense incurred and not yet paid. It is added to the salary expense in the Profit and Loss Account and shown as a liability (outstanding expense) in the Balance Sheet. Prepaid expense is the opposite case, where payment is made for a future period.

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