Insurance paid by a sole trader includes Rs. 5,000 relating to the next accounting year. What is the proper adjustment?
Correct answer: B. Deduct Rs. 5,000 from insurance expense and record a current asset
- A. Add Rs. 5,000 to insurance expense and record a liability
- B. Deduct Rs. 5,000 from insurance expense and record a current asset
- C. Transfer Rs. 5,000 to drawings and reduce capital
- D. Record Rs. 5,000 as income in the current year
Explanation
The amount relating to the next year is prepaid and is not a current-year expense. It is deducted from insurance expense and shown as a current asset.
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About Financial Statements of Sole Traders
Sole trader statements calculate revenue, cost of sales, gross profit, operating expenses and net profit, then present assets, liabilities and owner’s capital in the statement of financial position. Adjustments for closing inventory, accruals, prepayments, depreciation, bad debts, drawings and additional capital connect the two statements.
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