Accruals and prepayments

Topic 14: Accruals and Prepayments — 50 Hard MCQs

1. A business pays insurance of $7200 on 1 April 2025 for one year. The financial year ends on 31 December 2025.

What amount should be charged to the income statement for the year ended 31 December 2025?

A $1800
B $5400
C $7200
D $9000

2. Using the information in Question 1, what amount is shown in the statement of financial position at 31 December 2025?

A $1800 current asset
B $1800 current liability
C $5400 current asset
D $7200 expense payable

3. Rent of $18 000 was paid on 1 September 2025 for the six months ending 28 February 2026. The financial year ends on 31 December 2025.

What is the rent expense for the year ended 31 December 2025?

A $6000
B $9000
C $12 000
D $18 000

4. Using the information in Question 3, what is the prepayment at 31 December 2025?

A $3000
B $6000
C $9000
D $12 000

5. A business pays rates of $4800 for the year ending 31 March 2026. The payment was made on 1 April 2025. The financial year ends on 31 December 2025.

What amount is prepaid at 31 December 2025?

A $1200
B $2400
C $3600
D $4800

6. A business paid $15 000 wages during the year. At the year end, wages owing were $2200. At the start of the year, wages owing were $1800.

What amount is charged to the income statement?

A $14 600
B $15 000
C $15 400
D $19 000

7. A business paid rent of $20 000 during the year. Rent prepaid at the start was $3000. Rent prepaid at the end was $5000.

What rent expense is charged to the income statement?

A $18 000
B $20 000
C $22 000
D $28 000

8. A business paid electricity of $9600 during the year. Electricity owing at the start was $1400 and electricity owing at the end was $1900.

What is the electricity expense for the year?

A $9100
B $9600
C $10 100
D $12 900

9. A business paid insurance of $12 400 during the year. Insurance prepaid at the start was $1600 and insurance owing at the end was $900.

What is the insurance expense for the year?

A $9900
B $11 700
C $13 100
D $14 900

10. A business paid rent of $30 000 during the year. Rent owing at the start was $4000 and rent prepaid at the end was $2500.

What is the rent expense for the year?

A $23 500
B $28 500
C $31 500
D $36 500

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. A business paid advertising of $8400 during the year. Advertising prepaid at the start was $1200 and advertising prepaid at the end was $700.

What is advertising expense for the year?

A $7900
B $8400
C $8900
D $10 300

12. A business received commission income of $19 000 during the year. Commission accrued at the start was $2400 and commission accrued at the end was $3100.

What commission income is shown in the income statement?

A $18 300
B $19 000
C $19 700
D $24 500

13. A business received rent income of $26 000 during the year. Rent received in advance at the start was $5000 and rent received in advance at the end was $3500.

What rent income is shown in the income statement?

A $24 500
B $26 000
C $27 500
D $34 500

14. A business received fees of $42 000 during the year. Fees accrued at the start were $6000 and fees received in advance at the end were $4500.

What fees income is shown in the income statement?

A $31 500
B $40 500
C $43 500
D $52 500

15. A business received subscription income of $18 500 during the year. Subscriptions received in advance at the start were $2100. Subscriptions received in advance at the end were $2700.

What subscription income is shown in the income statement?

A $17 900
B $18 500
C $19 100
D $23 300

16. A business received rent income of $33 000 during the year. Rent accrued at the start was $4000 and rent accrued at the end was $6500.

What rent income is shown in the income statement?

A $30 500
B $33 000
C $35 500
D $43 500

17. A business received commission of $12 000 during the year. Commission received in advance at the start was $1500 and commission accrued at the end was $2200.

What commission income is shown in the income statement?

A $8300
B $11 300
C $12 700
D $15 700

18. A business received income of $28 000 during the year. Income accrued at the start was $3500 and income received in advance at the start was $2000. Income accrued at the end was $4100 and income received in advance at the end was $2600.

What income is shown in the income statement?

A $27 400
B $28 000
C $28 600
D $30 600

19. A business pays $9000 for a 15-month advertising contract starting on 1 October 2025. The financial year ends on 31 December 2025.

What amount is charged to the income statement?

A $1800
B $2250
C $6750
D $9000

20. Using the information in Question 19, what is shown in the statement of financial position?

A $2250 prepayment
B $6750 prepayment
C $2250 accrued expense
D $9000 current liability

21. A business receives $7200 on 1 August 2025 for services to be provided evenly over 12 months. The financial year ends on 31 December 2025.

What income is recognised for the year ended 31 December 2025?

A $3000
B $4200
C $7200
D $12 000

22. Using the information in Question 21, what is shown in the statement of financial position at 31 December 2025?

A $3000 current asset
B $4200 current liability
C $4200 current asset
D $7200 income

23. A business pays $3600 on 1 November 2025 for a 6-month service contract. The financial year ends on 31 December 2025.

What amount is prepaid?

A $1200
B $1800
C $2400
D $3600

24. A business receives $15 000 on 1 July 2025 for rent for the 10 months ending 30 April 2026. The financial year ends on 31 December 2025.

What amount is income received in advance at 31 December 2025?

A $3000
B $6000
C $9000
D $15 000

25. A business pays $24 000 on 1 March 2025 for rent for 12 months. The financial year ends on 31 December 2025.

What rent expense is charged to the income statement?

A $4000
B $20 000
C $24 000
D $28 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

26. A business receives $48 000 on 1 May 2025 for services to be provided over 16 months. The financial year ends on 31 December 2025.

What income is recognised for the year ended 31 December 2025?

A $12 000
B $24 000
C $36 000
D $48 000

27. A business paid loan interest of $7000 during the year. At the start, interest owing was $1200. At the end, interest owing was $2500.

What is the interest expense for the year?

A $5700
B $7000
C $8300
D $10 700

28. A business paid salaries of $52 000 during the year. Salaries prepaid at the start were $3000. Salaries owing at the end were $4500.

What salary expense is charged to the income statement?

A $44 500
B $50 500
C $53 500
D $59 500

29. A business paid insurance of $9600 during the year. Insurance owing at the start was $1000. Insurance prepaid at the end was $1500.

What is the insurance expense for the year?

A $7100
B $8100
C $9100
D $12 100

30. A business paid rent of $36 000 during the year. Rent prepaid at the start was $5000. Rent owing at the end was $6000.

What rent expense is shown in the income statement?

A $25 000
B $35 000
C $37 000
D $47 000

31. A business paid general expenses of $18 000 during the year. General expenses owing at the start were $2200. General expenses prepaid at the start were $1000. General expenses owing at the end were $3100. General expenses prepaid at the end were $1600.

What expense is charged to the income statement?

A $16 500
B $18 300
C $18 500
D $20 900

32. A business received income of $50 000 during the year. Income accrued at the start was $5500. Income received in advance at the start was $4200. Income accrued at the end was $6700. Income received in advance at the end was $5100.

What income is recognised?

A $48 900
B $50 300
C $51 100
D $61 500

33. A business received fees of $24 000 during the year. At the start, fees received in advance were $2500. At the end, fees accrued were $1800.

What fees income is recognised?

A $19 700
B $23 300
C $24 700
D $28 300

34. A business received rent of $44 000 during the year. Rent accrued at the start was $7000. Rent received in advance at the end was $6000.

What rent income is recognised?

A $31 000
B $43 000
C $45 000
D $57 000

35. A business paid $6000 for insurance on 1 July 2025 covering the year to 30 June 2026. On 1 January 2025, insurance prepaid was $2500. The financial year ends on 31 December 2025.

What is the insurance expense for the year ended 31 December 2025?

A $3000
B $5500
C $6000
D $8500

36. A business paid $12 000 for rent on 1 October 2025 covering the period 1 October 2025 to 31 March 2026. Rent owing at 1 January 2025 was $1500. The financial year ends on 31 December 2025.

What is rent expense for the year ended 31 December 2025?

A $6000
B $7500
C $9000
D $13 500

37. Which double entry records an accrued expense at the year end?

A debit expense, credit accrued expense
B debit accrued expense, credit expense
C debit prepaid expense, credit expense
D debit bank, credit expense

38. Which double entry records a prepaid expense at the year end?

A debit expense, credit prepaid expense
B debit prepaid expense, credit expense
C debit accrued expense, credit bank
D debit expense, credit accrued expense

39. Which double entry records accrued income at the year end?

A debit accrued income, credit income
B debit income, credit accrued income
C debit bank, credit accrued income
D debit income received in advance, credit income

40. Which double entry records income received in advance at the year end?

A debit income, credit income received in advance
B debit income received in advance, credit income
C debit accrued income, credit income
D debit bank, credit income

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A business fails to record accrued wages of $2400.

What is the effect?

A profit overstated and liabilities understated
B profit understated and liabilities overstated
C profit overstated and assets understated
D profit understated and assets understated

42. A business fails to record prepaid insurance of $1800.

What is the effect?

A profit overstated and assets overstated
B profit understated and assets understated
C profit overstated and liabilities understated
D profit understated and liabilities overstated

43. A business fails to record accrued rent income of $3200.

What is the effect?

A profit overstated and liabilities understated
B profit understated and assets understated
C profit understated and liabilities overstated
D profit overstated and assets overstated

44. A business fails to record income received in advance of $2700.

What is the effect?

A profit overstated and liabilities understated
B profit understated and liabilities overstated
C profit overstated and assets understated
D profit understated and assets overstated

45. A business records a prepayment of $900 as an accrual.

What is the total effect on profit compared with the correct profit?

A profit overstated by $900
B profit understated by $900
C profit overstated by $1800
D profit understated by $1800

46. A business records an accrued expense of $1200 as a prepayment.

What is the total effect on profit compared with the correct profit?

A profit overstated by $1200
B profit understated by $1200
C profit overstated by $2400
D profit understated by $2400

47. A business records accrued income of $1600 as income received in advance.

What is the total effect on profit compared with the correct profit?

A profit overstated by $1600
B profit understated by $1600
C profit overstated by $3200
D profit understated by $3200

48. A business records income received in advance of $2000 as accrued income.

What is the total effect on profit compared with the correct profit?

A profit overstated by $2000
B profit understated by $2000
C profit overstated by $4000
D profit understated by $4000

49. Which statement about accruals is correct?

A accrued expenses are current assets
B accrued income is a current asset
C income received in advance is a current asset
D prepaid expenses are current liabilities

50. Which statement about prepayments is correct?

A prepaid expenses are current assets
B prepaid expenses are current liabilities
C income received in advance is income of the current year
D accrued income reduces profit

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

1. B — $5400

• Insurance paid = $7200 for 12 months.

• Monthly insurance = 7200 / 12 = $600

• Period used in current year: April to December = 9 months

• Expense = 9 × 600 = $5400

2. A — $1800 current asset

• Total insurance = $7200

• Expense used = $5400

• Prepaid insurance = 7200 – 5400 = $1800

• Prepayment = current asset.

3. C — $12 000

• Rent = $18 000 for 6 months.

• Monthly rent = 18 000 / 6 = $3000

• Period used: September to December = 4 months

• Expense = 4 × 3000 = $12 000

4. B — $6000

• Remaining period after 31 December: January and February = 2 months

• Prepayment = 2 × 3000 = $6000

5. A — $1200

• Rates cover 1 April 2025 to 31 March 2026.

• Year ends 31 December 2025.

• Prepaid period = January to March = 3 months

• Monthly rates = 4800 / 12 = $400

• Prepayment = 3 × 400 = $1200

6. C — $15 400

• Expense = paid – opening owing + closing owing

• = 15 000 – 1800 + 2200

• = $15 400

7. A — $18 000

• Expense = paid + opening prepayment – closing prepayment

• = 20 000 + 3000 – 5000

• = $18 000

8. C — $10 100

• Expense = paid – opening owing + closing owing

• = 9600 – 1400 + 1900

• = $10 100

9. D — $14 900

• Expense = paid + opening prepayment + closing owing

• = 12 400 + 1600 + 900

• = $14 900

10. A — $23 500

• Expense = paid – opening owing – closing prepayment

• = 30 000 – 4000 – 2500

• = $23 500

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

11. C — $8900

• Expense = paid + opening prepayment – closing prepayment

• = 8400 + 1200 – 700

• = $8900

12. C — $19 700

• Income = cash received – opening accrued income + closing accrued income

• = 19 000 – 2400 + 3100

• = $19 700

13. C — $27 500

• Income = cash received + opening income received in advance – closing income received in advance

• = 26 000 + 5000 – 3500

• = $27 500

14. A — $31 500

• Income = cash received – opening accrued income – closing income received in advance

• = 42 000 – 6000 – 4500

• = $31 500

15. A — $17 900

• Income = received + opening advance – closing advance

• = 18 500 + 2100 – 2700

• = $17 900

16. C — $35 500

• Income = received – opening accrued income + closing accrued income

• = 33 000 – 4000 + 6500

• = $35 500

17. D — $15 700

• Income = received + opening income received in advance + closing accrued income

• = 12 000 + 1500 + 2200

• = $15 700

18. B — $28 000

• Income = received – opening accrued + opening advance + closing accrued – closing advance

• = 28 000 – 3500 + 2000 + 4100 – 2600

• = $28 000

19. A — $1800

• Advertising contract = $9000 for 15 months.

• Monthly cost = 9000 / 15 = $600

• Current year period: October to December = 3 months

• Expense = 3 × 600 = $1800

20. No correct option — correct prepayment is $7200

• Total paid = $9000

• Expense used = $1800

• Prepayment = 9000 – 1800

• = $7200

• The options show $6750, which would only make sense if the contract were incorrectly treated as 12 months.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

21. A — $3000

• Income received = $7200 for 12 months.

• Monthly income = 7200 / 12 = $600

• Period earned: August to December = 5 months

• Income recognised = 5 × 600 = $3000

22. B — $4200 current liability

• Unearned period: January to July = 7 months

• Income received in advance = 7 × 600 = $4200

• This is a current liability.

23. C — $2400

• Service contract = $3600 for 6 months.

• Monthly cost = 3600 / 6 = $600

• Used: November and December = 2 months = $1200

• Prepaid: January to April = 4 months = $2400

24. B — $6000

• Rent received = $15 000 for 10 months.

• Monthly rent = 15 000 / 10 = $1500

• Unearned period: January to April = 4 months

• Income received in advance = 4 × 1500 = $6000

25. B — $20 000

• Rent = $24 000 for 12 months.

• Monthly rent = 24 000 / 12 = $2000

• Current year period: March to December = 10 months

• Expense = 10 × 2000 = $20 000

26. B — $24 000

• Income = $48 000 for 16 months.

• Monthly income = 48 000 / 16 = $3000

• Earned period: May to December = 8 months

• Income recognised = 8 × 3000 = $24 000

27. C — $8300

• Expense = paid – opening owing + closing owing

• = 7000 – 1200 + 2500

• = $8300

28. D — $59 500

• Expense = paid + opening prepayment + closing owing

• = 52 000 + 3000 + 4500

• = $59 500

29. A — $7100

• Expense = paid – opening owing – closing prepayment

• = 9600 – 1000 – 1500

• = $7100

30. D — $47 000

• Expense = paid + opening prepayment + closing owing

• = 36 000 + 5000 + 6000

• = $47 000

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

31. B — $18 300

• Expense = paid – opening owing + opening prepaid + closing owing – closing prepaid

• = 18 000 – 2200 + 1000 + 3100 – 1600

• = $18 300

32. B — $50 300

• Income = received – opening accrued + opening advance + closing accrued – closing advance

• = 50 000 – 5500 + 4200 + 6700 – 5100

• = $50 300

33. D — $28 300

• Income = received + opening advance + closing accrued

• = 24 000 + 2500 + 1800

• = $28 300

34. A — $31 000

• Income = received – opening accrued – closing advance

• = 44 000 – 7000 – 6000

• = $31 000

35. B — $5500

• Opening prepaid insurance = $2500, which relates to the current year.

• New policy paid on 1 July = $6000 for 12 months.

• Current year portion of new policy = July to December = 6 months

• 6000 × 6/12 = $3000

• Total expense = 2500 + 3000

• = $5500

36. A — $6000

• Rent paid on 1 October covers October to March.

• Monthly rent = 12 000 / 6 = $2000

• Current year portion = October to December = 3 months

• Expense = 3 × 2000 = $6000

• Opening rent owing relates to the previous year, so it is not a current year expense.

37. A — debit expense, credit accrued expense

• Accrued expense = expense incurred but unpaid.

• Expense increases = debit.

• Liability increases = credit.

38. B — debit prepaid expense, credit expense

• Prepaid expense = paid but not yet used.

• Current asset increases = debit.

• Expense must be reduced = credit.

39. A — debit accrued income, credit income

• Accrued income = income earned but not yet received.

• Current asset increases = debit.

• Income increases = credit.

40. A — debit income, credit income received in advance

• Income received in advance is not yet earned.

• Income must be reduced = debit.

• Liability increases = credit.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.

41. A — profit overstated and liabilities understated

• Accrued wages are unpaid expenses.

• If not recorded:

  • expenses understated

  • profit overstated

  • liabilities understated

42. B — profit understated and assets understated

• Prepaid insurance means too much expense has been charged.

• If not recorded:

  • expenses overstated

  • profit understated

  • current assets understated

43. B — profit understated and assets understated

• Accrued rent income is income earned but not yet received.

• If not recorded:

  • income understated

  • profit understated

  • current assets understated

44. A — profit overstated and liabilities understated

• Income received in advance is unearned income.

• If not recorded:

  • income overstated

  • profit overstated

  • liabilities understated

45. D — profit understated by $1800

• Correct treatment of prepayment:

  • reduce expense by $900

  • profit increases by $900

• Wrong treatment as accrual:

  • increase expense by $900

  • profit decreases by $900

• Total difference = 900 + 900 = $1800 understated

46. C — profit overstated by $2400

• Correct treatment of accrued expense:

  • increase expense by $1200

  • profit decreases by $1200

• Wrong treatment as prepayment:

  • reduce expense by $1200

  • profit increases by $1200

• Total difference = 1200 + 1200 = $2400 overstated

47. D — profit understated by $3200

• Correct treatment of accrued income:

  • increase income by $1600

  • profit increases by $1600

• Wrong treatment as income received in advance:

  • reduce income by $1600

  • profit decreases by $1600

• Total difference = 1600 + 1600 = $3200 understated

48. C — profit overstated by $4000

• Correct treatment of income received in advance:

  • reduce income by $2000

  • profit decreases by $2000

• Wrong treatment as accrued income:

  • increase income by $2000

  • profit increases by $2000

• Total difference = 2000 + 2000 = $4000 overstated

49. B — accrued income is a current asset

• Accrued income is income earned but not yet received.

• It is shown as a current asset.

• Accrued expenses are current liabilities.

• Income received in advance is a current liability.

50. A — prepaid expenses are current assets

• Prepaid expenses are paid before the benefit is used.

• They are current assets because they represent future benefit.

Written and Compiled By Sir Hunain Zia (AYLOTI), World Record Holder With 154 Total A Grades, 11 World Records and 7 Distinctions, Educate A Change.