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

Brightway Ltd has a year end of 31 December. On 1 January it owed $1,200 for electricity. During the year it paid $9,000 in cash for electricity, which included the $1,200 owed at the start. At 31 December it had used a further $2,400 of electricity for which no bill had been received. What is the electricity expense for the year?

The electricity expense is $10,200. Start with cash paid of $9,000, remove the $1,200 opening accrual that relates to the prior year, and add the $2,400 closing accrual for electricity used but not yet billed.

  1. A$9,000
  2. B$10,200Correct
  3. C$8,400
  4. D$11,400

Explanation

Expense = cash paid 9,000 - opening accrual 1,200 + closing accrual 2,400 = $10,200. Option C wrongly deducts the closing accrual instead of adding it, giving 9,000 - 1,200 - 2,400 = 5,400? No: it reflects 9,000 - 1,200 + 0 adjustments errors; the key is that the closing accrual is added.

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