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CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship

Rent paid during the year ended 31 March 2025 by Ramesh Traders was Rs 48,000, which includes Rs 4,000 paid in advance for April 2025. How should the adjustment be shown in the final accounts?

Prepaid rent of Rs 4,000 belongs to the next year, so only Rs 44,000 is charged to Profit and Loss Account, and Rs 4,000 appears as prepaid rent among current assets in the Balance Sheet.

  1. ADebit Rent Rs 48,000 in Profit and Loss Account and show nothing in Balance Sheet
  2. BDebit Rs 44,000 in Profit and Loss Account and show Rs 4,000 as prepaid rent under current assetsCorrect
  3. CDebit Rs 52,000 in Profit and Loss Account and show Rs 4,000 as outstanding rent under current liabilities
  4. DDebit Rs 44,000 in Profit and Loss Account and show Rs 4,000 as outstanding rent under current liabilities

Explanation

Rent of Rs 4,000 relates to the next year, so it is deducted from the expense: 48,000 - 4,000 = 44,000 charged to Profit and Loss Account. The Rs 4,000 is a prepaid expense, an asset. Option 3 wrongly adds it as if it were outstanding.

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