A business pays Rs 48,000 on 1 December for a four-month maintenance contract covering December through March. What amounts are reported at 31 December?
Correct answer: A. Expense Rs 12,000 and prepaid asset Rs 36,000
- A. Expense Rs 12,000 and prepaid asset Rs 36,000
- B. Expense Rs 36,000 and prepaid asset Rs 12,000
- C. Expense Rs 48,000 and prepaid asset nil
- D. Expense nil and prepaid asset Rs 48,000
Explanation
Only one of the four months has been consumed by 31 December, so the expense is Rs 12,000. The remaining three months represent a future benefit and are reported as a prepaid asset of Rs 36,000. The payment is allocated according to the period benefited.
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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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