CA Foundation · Accounting · Accounting Process
Under the accrual basis of accounting, rent of Rs 24,000 for the year ended 31 March was paid in cash on 1 April of the following year. How should the firm treat this in the books for the year ended 31 March?
The firm should record Rs 24,000 as outstanding rent, charging it as an expense for the year and showing a liability at year end. Accrual accounting recognises expenses when incurred rather than when cash is actually paid.
- AIgnore it until payment is made in the next year
- BRecord it as outstanding rent, a liability, and charge it as expense for the yearCorrect
- CRecord it as prepaid rent, an asset
- DCharge it as drawings of the proprietor
Explanation
Accrual accounting recognises expenses when incurred, not when cash is paid. The rent relates to the year ended 31 March but is unpaid at that date, so it is charged to that year's profit and shown as outstanding rent under current liabilities. Treating it as prepaid would reverse the nature of the item.
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