A business pays Rs 24,000 for 12 months of insurance beginning on 1 October. What insurance expense and prepaid insurance balance are reported on 31 December?
Correct answer: A. Expense Rs 6,000 and prepayment Rs 18,000
- A. Expense Rs 6,000 and prepayment Rs 18,000
- B. Expense Rs 18,000 and prepayment Rs 6,000
- C. Expense Rs 24,000 and prepayment nil
- D. Expense Rs 2,000 and prepayment Rs 22,000
Explanation
Three months, October through December, belong to the current year. Therefore, Rs 6,000 is charged as expense, and the remaining Rs 18,000 is carried forward as a current asset.
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About Accruals, Prepayments and Provisions
Accruals and prepayments adjust income and expenses to the accounting period in which they are earned or incurred, following the matching principle. Provisions recognise expected obligations or losses when their amount or timing is uncertain, which distinguishes them from ordinary accruals and from general reserves.
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