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CMA Foundation · Fundamentals of Financial and Cost Accounting · Adjustment Entries and Rectification of Errors

Verma Stores paid Rs 12,000 as rent in advance for April 2025 on 28 March 2025 and debited it to Rent Account. Books close on 31 March 2025. Which adjustment is correct at year end?

The adjusting entry is to debit Prepaid Rent Account and credit Rent Account by Rs 12,000. Rent for April 2025 relates to the next accounting year, so it is excluded from this year's expense and shown as a current asset in the Balance Sheet.

  1. ACredit Rent Account and debit Prepaid Rent Account by Rs 12,000Correct
  2. BDebit Rent Account and credit Outstanding Rent Account by Rs 12,000
  3. CDebit Prepaid Rent Account and credit Cash Account by Rs 12,000
  4. DNo adjustment is needed since rent was paid in the year

Explanation

Rent for April 2025 belongs to the next year, so it must be removed from the current year's expense. Credit Rent Account and debit Prepaid Rent (a current asset). Option 2 treats it as outstanding, which is the opposite situation.

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