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CMA Intermediate · Financial Accounting · Final Accounts of Commercial Organisations

Rao Enterprises had outstanding salaries of Rs 8,000 at the start of the year and prepaid salaries of Rs 3,000 at the end of the year. Salaries paid in cash during the year were Rs 1,20,000. Additionally, Rs 5,000 of salaries for the year is still unpaid at year end. What is the salaries expense to be debited to the Profit and Loss Account?

The expense is Rs 1,14,000. Starting from cash paid of Rs 1,20,000, deduct opening outstanding of Rs 8,000 and closing prepaid of Rs 3,000, then add closing outstanding of Rs 5,000, giving the amount that relates to the year.

  1. ARs 1,14,000Correct
  2. BRs 1,20,000
  3. CRs 1,24,000
  4. DRs 1,26,000

Explanation

Expense = paid 1,20,000 - opening outstanding 8,000 + closing outstanding 5,000 - closing prepaid 3,000 = Rs 1,14,000. Check: 1,20,000 - 8,000 = 1,12,000; +5,000 = 1,17,000; -3,000 = 1,14,000. Adding the prepaid amount would give Rs 1,20,000 instead, which is wrong.

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