CMA Foundation · Fundamentals of Financial and Cost Accounting · Financial Statements of Sole Proprietorship
Which treatment of prepaid insurance of Rs 4,000 at the year-end is correct in the balance sheet of a sole proprietor?
Prepaid insurance is shown as a current asset because the business has paid in advance for cover that will be received in the next accounting period. It is carried forward on the assets side and is not a liability or a deduction from capital.
- AShown as a current assetCorrect
- BShown as a current liability
- CDeducted from capital
- DAdded to closing stock
Explanation
Prepaid insurance is a payment made for a benefit to be received in the next period, so it is an asset, shown as a current asset. Showing it as a liability would reverse its nature, which is the common error.
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