Accruals and prepayments, accrued income, income received in advance, matching concept traps

1. Insurance paid during the year was $7500. At the start of the year, insurance prepaid was $600. At the end of the year, insurance prepaid was $900. What amount should be charged to the income statement?

A $6900
B $7200
C $7500
D $7800

2. Rent paid during the year was $10 200. Rent accrued at the start of the year was $800. Rent accrued at the end of the year was $1200. What rent expense should be charged?

A $8200
B $9800
C $10 600
D $12 200

3. Electricity paid during the year was $9600. At the start of the year, electricity prepaid was $300 and electricity accrued was $400. At the end of the year, electricity prepaid was $500 and electricity accrued was $700. What was the electricity expense?

A $9300
B $9500
C $9700
D $9900

4. Commission received during the year was $6300. Commission accrued at the start was $500. Commission accrued at the end was $900. What was commission income earned?

A $4900
B $5900
C $6700
D $7700

5. Rent received during the year was $12 000. Rent received in advance at the start was $1000. Rent received in advance at the end was $700. What rent income should be recorded?

A $10 300
B $11 700
C $12 300
D $13 700

6. Subscriptions received during the year were $9200. At the start, subscriptions in arrears were $800 and subscriptions in advance were $500. At the end, subscriptions in arrears were $600 and subscriptions in advance were $900. What subscription income should be shown?

A $8000
B $8600
C $9000
D $10 000

7. Closing prepaid insurance of $450 was omitted from the financial statements. What was the effect?

A Profit overstated and assets overstated by $450
B Profit understated and assets understated by $450
C Profit overstated and liabilities understated by $450
D Profit understated and liabilities overstated by $450

8. Closing accrued wages of $700 were omitted. What was the effect?

A Profit overstated and liabilities understated by $700
B Profit understated and liabilities overstated by $700
C Profit overstated and assets overstated by $700
D Profit understated and assets understated by $700

9. Income received in advance of $1200 was wrongly treated as income earned. What was the effect?

A Profit understated and assets understated by $1200
B Profit overstated and liabilities understated by $1200
C Profit understated and liabilities overstated by $1200
D Profit overstated and assets understated by $1200

10. Accrued income of $800 was omitted. What was the effect?

A Profit overstated and assets overstated by $800
B Profit understated and assets understated by $800
C Profit overstated and liabilities understated by $800
D Profit understated and liabilities overstated by $800

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. On 1 July, a business paid $3600 for insurance for the year ending 30 June next year. The financial year ends on 31 December. What are the correct amounts?

A Insurance expense $1800, prepayment $1800
B Insurance expense $3600, prepayment nil
C Insurance expense $900, prepayment $2700
D Insurance expense $2700, prepayment $900

12. On 1 December, a trader paid rent of $2400 for three months ending 28 February. The financial year ends on 31 December. What rent expense should be charged for the year?

A $800
B $1600
C $2400
D nil

13. Wages paid during the year were $48 000. Wages accrued at the start were $3200. Wages accrued at the end were $2800. What wages expense should be charged?

A $42 000
B $47 600
C $48 400
D $54 000

14. Rates paid during the year were $5000. At the start, rates prepaid were $400 and rates accrued were $800. At the end, rates prepaid were $600 and rates accrued were $1000. What rates expense should be charged?

A $4400
B $4800
C $5000
D $5200

15. At the end of the year, an expense had both an accrued amount of $300 and a prepaid amount of $120. Neither was recorded. What was the net effect on profit?

A Profit overstated by $180
B Profit understated by $180
C Profit overstated by $420
D Profit understated by $420

16. Opening accrued expense of $500 was ignored when calculating the current year expense. What was the effect on current year profit?

A Profit overstated by $500
B Profit understated by $500
C Profit overstated by $1000
D No effect

17. Opening prepaid expense of $400 was ignored when calculating the current year expense. What was the effect on current year profit?

A Profit overstated by $400
B Profit understated by $400
C Profit overstated by $800
D No effect

18. Closing prepaid expense of $700 was wrongly treated as an accrued expense. What was the effect?

A Profit overstated by $700, liabilities overstated by $700
B Profit understated by $700, assets understated by $700
C Profit understated by $1400, assets understated by $700 and liabilities overstated by $700
D Profit overstated by $1400, assets overstated by $700 and liabilities understated by $700

19. Closing accrued expense of $600 was wrongly treated as a prepaid expense. What was the effect?

A Profit overstated by $1200, assets overstated by $600 and liabilities understated by $600
B Profit understated by $1200, assets understated by $600 and liabilities overstated by $600
C Profit overstated by $600, assets overstated by $600 only
D Profit understated by $600, liabilities overstated by $600 only

20. Income received in advance of $500 was wrongly treated as accrued income. What was the effect?

A Profit overstated by $1000, assets overstated by $500 and liabilities understated by $500
B Profit understated by $1000, assets understated by $500 and liabilities overstated by $500
C Profit overstated by $500 and assets overstated by $500 only
D Profit understated by $500 and liabilities overstated by $500 only

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. Accrued income of $400 was wrongly treated as income received in advance. What was the effect?

A Profit overstated by $800, assets overstated by $400 and liabilities understated by $400
B Profit understated by $800, assets understated by $400 and liabilities overstated by $400
C Profit understated by $400 and assets understated by $400 only
D Profit overstated by $400 and liabilities understated by $400 only

22. Rent paid during the year was $18 000. At the start of the year rent prepaid was $1200. At the end of the year rent accrued was $1600. There were no other rent balances. What rent expense should be charged?

A $15 200
B $18 400
C $20 800
D $21 000

23. Commission received during the year was $26 000. At the start, commission accrued was $2000. At the end, commission received in advance was $3000. There were no other commission balances. What commission income was earned?

A $21 000
B $25 000
C $27 000
D $31 000

24. Fees received during the year were $15 000. This included $1500 accrued from last year and $1000 received for next year. Fees of $2000 earned in the current year were still unpaid at the year-end. What fees income should be shown?

A $10 500
B $14 500
C $15 500
D $19 500

25. Expenses paid during the year were $12 000. This included $800 owing from last year and $1000 paid for next year. Expenses of $600 for the current year were still unpaid at the year-end. What expense should be charged?

A $9600
B $10 800
C $12 200
D $14 400

26. A business paid $9000 during the year for advertising. At the start, advertising prepaid was $700. At the end, advertising prepaid was $1100. What was the advertising expense?

A $7200
B $8600
C $9400
D $10 800

27. Opening income received in advance of $950 was not transferred to income during the current year. What was the effect?

A Profit overstated and liabilities understated by $950
B Profit understated and liabilities overstated by $950
C Profit overstated and assets overstated by $950
D Profit understated and assets understated by $950

28. Opening accrued income of $650 was ignored when calculating income for the current year. What was the effect on current year profit?

A Profit overstated by $650
B Profit understated by $650
C Profit overstated by $1300
D No effect

29. A payment of $1800 made in advance for services to be received next year was wrongly recorded as an expense of the current year. What was the effect?

A Profit overstated and assets overstated by $1800
B Profit understated and assets understated by $1800
C Profit overstated and liabilities understated by $1800
D Profit understated and liabilities overstated by $1800

30. A customer paid $2500 in advance for goods to be supplied next year. This was wrongly recorded as sales revenue. What was the effect?

A Profit overstated and liabilities understated by $2500
B Profit understated and liabilities overstated by $2500
C Profit overstated and assets overstated by $2500
D Profit understated and assets understated by $2500

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. Which statement best describes the matching concept?

A Expenses are recorded only when paid in cash.
B Income is recorded only when received in cash.
C Income earned is matched with expenses incurred in earning it for the same period.
D Assets are always valued at market value.

32. Which accounting concept mainly explains why accrued expenses and prepaid expenses are adjusted?

A Business entity
B Matching/accruals
C Prudence only
D Money measurement

33. A prepaid expense at the year-end is shown in the statement of financial position as:

A Current asset
B Current liability
C Non-current liability
D Capital

34. An accrued expense at the year-end is shown in the statement of financial position as:

A Current asset
B Current liability
C Revenue
D Drawings

35. Accrued income at the year-end is shown in the statement of financial position as:

A Current asset
B Current liability
C Expense
D Capital introduced

36. Income received in advance at the year-end is shown in the statement of financial position as:

A Current asset
B Current liability
C Non-current asset
D Expense

37. The income statement expense was $8500. Opening accrued expense was $700. Closing accrued expense was $900. Opening prepaid expense was $300. Closing prepaid expense was $400. What was the cash paid during the year?

A $8100
B $8400
C $8600
D $8900

38. Income earned for the year was $13 000. Opening accrued income was $700. Closing accrued income was $1000. Opening income received in advance was $400. Closing income received in advance was $600. What was cash received during the year?

A $12 100
B $12 900
C $13 100
D $13 700

39. Expenses paid during the year were $6400. At the start, expenses prepaid were $400 and expenses accrued were $200. At the end, expenses prepaid were $300 and expenses accrued were $500. What expense should be charged?

A $6000
B $6400
C $6800
D $7200

40. Income received during the year was $9900. At the start, accrued income was $500 and income received in advance was $800. At the end, accrued income was $700 and income received in advance was $300. What income was earned?

A $9000
B $9600
C $10 600
D $11 200

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. Electricity owing of $250 at the year-end was wrongly recorded as accrued income. What was the effect?

A Profit overstated by $500, assets overstated by $250 and liabilities understated by $250
B Profit understated by $500, assets understated by $250 and liabilities overstated by $250
C Profit overstated by $250, liabilities understated by $250 only
D Profit understated by $250, assets understated by $250 only

42. Rent prepaid of $600 at the year-end was wrongly recorded as income received in advance. What was the effect?

A Profit understated by $1200, assets understated by $600 and liabilities overstated by $600
B Profit overstated by $1200, assets overstated by $600 and liabilities understated by $600
C Profit understated by $600, liabilities overstated by $600 only
D Profit overstated by $600, assets overstated by $600 only

43. On 1 November, a trader paid $3600 for insurance covering six months to 30 April. The financial year ends on 31 December. What are the correct year-end amounts?

A Expense $1200, prepayment $2400
B Expense $1800, prepayment $1800
C Expense $2400, prepayment $1200
D Expense $3600, prepayment nil

44. On 1 September, a trader received $4800 rent for 12 months to 31 August next year. The financial year ends on 31 December. What are the correct year-end amounts?

A Rent income $1600, income received in advance $3200
B Rent income $3200, income received in advance $1600
C Rent income $4800, income received in advance nil
D Rent income nil, income received in advance $4800

45. A business earned commission of $3000 during the year. It received $2500 during the year and had opening accrued commission of $400. What was the closing accrued commission?

A $100
B $500
C $900
D $1100

46. Closing prepaid expense of $600 was entered on the wrong side of both the expense account and the prepayment account. What was the effect?

A Profit understated by $1200 and assets understated by $1200
B Profit overstated by $1200 and assets overstated by $1200
C Profit understated by $600 and assets understated by $600
D Profit overstated by $600 and assets overstated by $600

47. Closing accrued expense of $500 was entered on the wrong side of both the expense account and the accrual account. What was the effect?

A Profit overstated by $1000 and liabilities understated by $1000
B Profit understated by $1000 and liabilities overstated by $1000
C Profit overstated by $500 and liabilities understated by $500
D Profit understated by $500 and liabilities overstated by $500

48. Opening accrued expense of $300 and closing prepaid expense of $200 were both omitted when calculating the current year expense. What was the effect on profit?

A Profit overstated by $100
B Profit understated by $100
C Profit overstated by $500
D Profit understated by $500

49. Opening income received in advance of $400 and closing accrued income of $600 were both omitted when calculating current year income. What was the effect on profit?

A Profit overstated by $200
B Profit understated by $200
C Profit overstated by $1000
D Profit understated by $1000

50. Which statement is correct?

A Prepaid expenses reduce current year profit and are shown as liabilities.
B Accrued expenses increase current year profit and are shown as assets.
C Accrued income increases current year profit and is shown as an asset.
D Income received in advance increases current year profit and is shown as an asset.

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
   Expense = paid + opening prepaid − closing prepaid
   = 7500 + 600 − 900
   = $7200

2. C
   Expense = paid − opening accrued + closing accrued
   = 10 200 − 800 + 1200
   = $10 600

3. C
   Expense = paid + opening prepaid − closing prepaid − opening accrued + closing accrued
   = 9600 + 300 − 500 − 400 + 700
   = $9700

4. C
   Income earned = cash received − opening accrued income + closing accrued income
   = 6300 − 500 + 900
   = $6700

5. C
   Income earned = cash received + opening income in advance − closing income in advance
   = 12 000 + 1000 − 700
   = $12 300

6. B
   Subscription income = received − opening arrears + closing arrears + opening advance − closing advance
   = 9200 − 800 + 600 + 500 − 900
   = $8600

7. B
   Closing prepayment is an asset and reduces expense. If omitted, expense is overstated, so profit is understated and assets are understated.

8. A
   Closing accrued wages are an expense and a liability. If omitted, expenses are understated, so profit is overstated and liabilities are understated.

9. B
   Income received in advance is a liability. Treating it as income overstates profit and understates liabilities.

10. B
    Accrued income is income earned and an asset. If omitted, profit and assets are understated.

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
    Insurance covers July to June. By 31 December, 6 months have expired and 6 months are prepaid.
    Expense = 3600 × 6/12 = $1800
    Prepayment = $1800

12. A
    Rent covers 3 months. Only December belongs to the current year.
    Expense = 2400 ÷ 3 = $800

13. B
    Expense = paid − opening accrued + closing accrued
    = 48 000 − 3200 + 2800
    = $47 600

14. C
    Expense = paid + opening prepaid − closing prepaid − opening accrued + closing accrued
    = 5000 + 400 − 600 − 800 + 1000
    = $5000

15. A
    Accrued expense omitted overstates profit by $300.
    Prepaid expense omitted understates profit by $120.
    Net effect = profit overstated by $180.

16. B
    Opening accrued expense relates to last year and should be deducted from cash paid. If ignored, current year expense is overstated, so profit is understated by $500.

17. A
    Opening prepaid expense belongs to the current year and should be added to expense. If ignored, expense is understated, so profit is overstated by $400.

18. C
    Correct treatment: prepaid expense increases asset and reduces expense.
    Wrong treatment: accrued expense increases liability and increases expense.
    Profit is understated by $1400, assets understated by $700 and liabilities overstated by $700.

19. A
    Correct treatment: accrued expense increases expense and liability.
    Wrong treatment: prepaid expense reduces expense and increases asset.
    Profit is overstated by $1200, assets overstated by $600 and liabilities understated by $600.

20. A
    Correct treatment: income received in advance is liability and not current income.
    Wrong treatment: accrued income is asset and current income.
    Profit overstated by $1000, assets overstated by $500 and liabilities understated by $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.

21. B
    Correct treatment: accrued income increases income and asset.
    Wrong treatment: income received in advance reduces income and creates liability.
    Profit understated by $800, assets understated by $400 and liabilities overstated by $400.

22. C
    Expense = paid + opening prepaid + closing accrued
    = 18 000 + 1200 + 1600
    = $20 800

23. A
    Income = received − opening accrued income − closing income in advance
    = 26 000 − 2000 − 3000
    = $21 000

24. B
    Fees income = cash received − last year’s accrued income − next year’s advance + current year accrued income
    = 15 000 − 1500 − 1000 + 2000
    = $14 500

25. B
    Expense = paid − last year’s amount paid this year − next year’s prepayment + current year accrued expense
    = 12 000 − 800 − 1000 + 600
    = $10 800

26. B
    Advertising expense = 9000 + 700 − 1100
    = $8600

27. B
    Opening income received in advance becomes current year income when earned. If not transferred, income/profit is understated and liability is overstated.

28. A
    Opening accrued income was earned last year but received this year. It should be deducted from current year income. If ignored, profit is overstated by $650.

29. B
    Payment in advance for next year should be an asset. Recording it as current expense understates profit and assets.

30. A
    Advance received from a customer is a liability until goods are supplied. Recording it as sales overstates profit and understates liabilities.

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. C
    Matching means income earned in a period is matched with expenses incurred to earn that income in the same period.

32. B
    Accruals/matching explains why we adjust for unpaid, prepaid, accrued and advance amounts. Cash movement alone is not enough.

33. A
    A prepaid expense is a current asset because the business has paid for a future benefit.

34. B
    An accrued expense is a current liability because the business owes the amount.

35. A
    Accrued income is a current asset because income has been earned but not yet received.

36. B
    Income received in advance is a current liability because the business owes goods, services or a refund.

37. B
    Cash paid = expense + opening accrued − closing accrued − opening prepaid + closing prepaid
    = 8500 + 700 − 900 − 300 + 400
    = $8400

38. B
    Cash received = income + opening accrued − closing accrued − opening advance + closing advance
    = 13 000 + 700 − 1000 − 400 + 600
    = $12 900

39. C
    Expense = paid + opening prepaid − closing prepaid − opening accrued + closing accrued
    = 6400 + 400 − 300 − 200 + 500
    = $6800

40. C
    Income earned = received − opening accrued + closing accrued + opening advance − closing advance
    = 9900 − 500 + 700 + 800 − 300
    = $10 600

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
    Correct: accrued electricity is expense + liability.
    Wrong: recorded as accrued income, creating income + asset.
    Profit overstated by $500, assets overstated by $250 and liabilities understated by $250.

42. A
    Correct: rent prepaid is asset and reduces expense.
    Wrong: treated as income received in advance, creating liability and reducing income/profit.
    Profit understated by $1200, assets understated by $600 and liabilities overstated by $600.

43. A
    Insurance covers 6 months from November to April.
    Current year used = November and December = 2 months.
    Expense = 3600 × 2/6 = $1200
    Prepayment = 3600 × 4/6 = $2400

44. A
    Rent covers 12 months from September to August.
    Current year earned = September to December = 4 months.
    Income = 4800 × 4/12 = $1600
    Income received in advance = 4800 × 8/12 = $3200

45. C
    Income earned = received − opening accrued + closing accrued
    3000 = 2500 − 400 + closing accrued
    Closing accrued = $900

46. A
    Correct entry should be debit prepayment and credit expense.
    Wrong side means debit expense and credit prepayment.
    Profit is understated by $1200 and assets are understated by $1200.

47. A
    Correct entry should be debit expense and credit accrual.
    Wrong side means debit accrual and credit expense.
    Profit is overstated by $1000 and liabilities are understated by $1000.

48. D
    Opening accrued expense omitted makes expense overstated by $300.
    Closing prepaid expense omitted makes expense overstated by $200.
    Total profit understated = $500.

49. D
    Opening income received in advance should be added to current year income.
    Closing accrued income should also be added to current year income.
    Omitting both understates profit by 400 + 600 = $1000.

50. C
    Accrued income increases current year profit and is shown as a current asset. That is the clean rule. Everything else is accounting chaos wearing a fake moustache.

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.