An electricity bill of Rs. 16,000 relates to the current accounting year but will be paid next year. What is the effect of recognising this accrual?
Correct answer: B. Profit decreases and liabilities increase
- A. Profit increases and liabilities decrease
- B. Profit decreases and liabilities increase
- C. Assets increase and profit increases
- D. Cash decreases and liabilities decrease
Explanation
The unpaid electricity cost is an expense of the current year, so it reduces profit. Because it remains unpaid, an accrued expense liability of Rs. 16,000 is also recognised; no cash changes at the adjustment date.
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Financial statements present a business's financial performance and position through the income statement, statement of financial position, cash flow statement and changes in equity. Questions involve preparing and interpreting these statements, adjusting entries, depreciation, closing inventory, accrued and prepaid items, and distinguishing profit from cash flow.
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