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

At the year end, Zenith Co has an electricity bill for the last quarter that has not yet been received or recorded. Which journal correctly records the adjustment?

The adjustment is to debit the electricity expense and credit accruals. The cost was incurred in the year but not yet recorded, so profit must be reduced and a current liability recognised in the statement of financial position.

  1. ADebit Electricity expense; credit AccrualsCorrect
  2. BDebit Prepayments; credit Electricity expense
  3. CDebit Accruals; credit Electricity expense
  4. DDebit Electricity expense; credit Prepayments

Explanation

An expense incurred but unrecorded increases the expense (debit) and creates a current liability (credit accruals). Crediting the expense and debiting prepayments relates to expenses paid in advance, which is not the case here.

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