Skip to content

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

While preparing the final accounts of a sole proprietor, salaries of Rs 6,000 for the last month of the year remain unpaid. How should this adjustment be treated?

Outstanding salaries are added to the salaries expense in the Profit and Loss Account and shown as a liability in the Balance Sheet, because the expense has been incurred in the year even though it has not been paid. Prepaid items, not outstanding ones, are shown as assets.

  1. AAdd to salaries in the Trading Account and show as an asset
  2. BAdd to salaries in the Profit and Loss Account and show as an outstanding expense liability in the Balance SheetCorrect
  3. CDeduct from salaries in the Profit and Loss Account and show as an asset
  4. DIgnore it until the salaries are paid in the next year

Explanation

Under the accrual basis, an expense belongs to the period in which it is incurred. Unpaid salaries are added to the salaries expense in the Profit and Loss Account and shown as a current liability in the Balance Sheet. Deducting it and showing an asset is the treatment for prepaid expenses, which is the wrong treatment here.

Did you get it right without looking?

One question tells you little. A timed set on Accounting Cycle shows your real accuracy, how long you take and where you lose marks.

Practise Accounting CycleFree diagnostic mock

More Accounting Cycle questions