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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Rent of Rs 6,000 per month is payable by Joshi Stores. The rent account in the trial balance shows Rs 66,000 for the year ended 31 March, which covers only eleven months. How will the outstanding rent be treated in the final accounts?

Outstanding rent of Rs 6,000 is added to the rent expense in the Profit and Loss Account, making the charge Rs 72,000 for twelve months, and it is shown as a current liability in the Balance Sheet because it is owed but unpaid.

  1. ARs 6,000 added to rent in the Profit and Loss Account and shown as a current liability in the Balance SheetCorrect
  2. BRs 6,000 deducted from rent in the Profit and Loss Account and shown as a current asset in the Balance Sheet
  3. CRs 6,000 added to rent in the Profit and Loss Account and shown as a current asset in the Balance Sheet
  4. DRs 6,000 shown only in the Balance Sheet as a liability with no effect on the Profit and Loss Account

Explanation

Rent for twelve months is an expense of the year, so Rs 72,000 is charged (Rs 66,000 + Rs 6,000 outstanding). The unpaid Rs 6,000 is a liability at the year end. Treating it as an asset or ignoring it in the Profit and Loss Account would overstate profit or misstate the position.

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