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CMA Foundation · Fundamentals of Financial and Cost Accounting · Accounting Cycle

While preparing the final accounts of a sole proprietor for the year ended 31 March, outstanding salaries of Rs 8,000 are found to be unpaid. How is this adjustment treated?

Outstanding salaries are added to the salaries expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet, because under the accrual basis an expense incurred but not yet paid belongs to the current year.

  1. AAdded to salaries in the Profit and Loss Account and shown as a liability in the Balance SheetCorrect
  2. BDeducted from salaries in the Profit and Loss Account and shown as an asset in the Balance Sheet
  3. CAdded to salaries in the Profit and Loss Account and shown as an asset in the Balance Sheet
  4. DShown only in the Balance Sheet as a liability, with no effect on the Profit and Loss Account

Explanation

Under the accrual basis, expenses incurred but unpaid belong to the current year. Salaries expense is therefore increased by Rs 8,000 and the unpaid amount is a current liability. Treating it as an asset or ignoring it in the Profit and Loss Account overstates profit or misstates the Balance Sheet.

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