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CA Foundation · Accounting · Final Accounts of Sole Proprietors

Verma Traders paid an annual insurance premium of Rs 36,000 on 1 October 2023 for the year ending 30 September 2024. Its accounting year ends 31 March 2024. What amount will be charged to the Profit and Loss Account for the year ended 31 March 2024, and what will appear as prepaid insurance?

Rs 18,000 is charged to the Profit and Loss Account and Rs 18,000 is shown as prepaid insurance. The premium covers twelve months, and only six months from October to March fall in this year, so half the premium is carried forward as a current asset.

  1. ARs 36,000 charged; prepaid nil
  2. BRs 18,000 charged; prepaid Rs 18,000Correct
  3. CRs 18,000 charged; prepaid Rs 36,000
  4. DRs 30,000 charged; prepaid Rs 6,000

Explanation

Premium covers 12 months from 1 October. Oct to March is 6 months, so expense is 36,000 x 6/12 = Rs 18,000. The remaining 6 months, Rs 18,000, is prepaid insurance, shown as a current asset. Charging the full Rs 36,000 ignores the prepayment.

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