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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 in the trial balance of Mr. Ramesh Iyer is ₹48,000, which includes ₹12,000 paid in advance for April–June 2025. How will the prepaid portion be shown in the final accounts?

Prepaid rent is deducted from the rent expense in the Profit and Loss Account because it belongs to the next year, and it is shown as a current asset in the Balance Sheet, since the benefit is yet to be received.

  1. AAdded to rent expense in the Profit and Loss Account and shown as a liability
  2. BDeducted from rent in the Profit and Loss Account and shown as a current asset in the Balance SheetCorrect
  3. CDeducted from rent in the Profit and Loss Account and shown as a liability in the Balance Sheet
  4. DIgnored, as it relates to the next year and is not an adjustment

Explanation

Prepaid expense relates to the next period, so it is deducted from the rent expense (48,000 - 12,000 = 36,000 charged to the P&L). It is a benefit yet to be received, so it appears as a current asset. Showing it as a liability confuses it with outstanding expenses.

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