Free Accruals, Prepayments and Provisions MCQs with Answers
34 Accruals, Prepayments and Provisions MCQs from Accounting, each with the correct answer and a written explanation of why it is correct. Free and unlimited, with no account needed.
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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- A. Debit electricity expense and credit accrued electricity
- B. Debit accrued electricity and credit electricity expense
- C. Debit electricity expense and credit bank
- D. Debit bank and credit accrued electricity
Explanation: An accrued expense has been incurred in the current period but remains unpaid.
Correct answer: Debit electricity expense and credit accrued electricity- A. Expense Rs 18,000 and prepayment Rs 6,000
- B. Expense Rs 6,000 and prepayment Rs 18,000
- 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…
Correct answer: Expense Rs 6,000 and prepayment Rs 18,000- A. It increases profit and decreases liabilities
- B. It increases assets and increases profit
- C. It decreases profit and increases liabilities
- D. It decreases liabilities and increases cash
Explanation: The accrued expense is charged to the current period, reducing profit. Because it is unpaid, it also creates or increases a liability…
Correct answer: It decreases profit and increases liabilities- A. Debit insurance expense and credit prepaid insurance
- B. Debit insurance expense and credit cash
- C. Debit cash and credit insurance expense
- D. Debit prepaid insurance and credit insurance expense
Explanation: The unexpired portion provides a future benefit, so it is an asset rather than a current expense.
Correct answer: Debit prepaid insurance and credit insurance expense- A. A provision is an estimated liability, while a reserve is an appropriation of profit
- B. A provision is an asset, while a reserve is an expense payable
- C. A provision is paid in cash, while a reserve is always unpaid
- D. A provision records revenue, while a reserve records depreciation
Explanation: A provision is recognized for a present obligation whose amount or timing is uncertain.
Correct answer: A provision is an estimated liability, while a reserve is an appropriation of profit- A. A possible obligation exists with no reliable estimate
- B. Management plans a future expense and cash is available
- C. A present obligation exists, outflow is probable, and amount is reliably estimated
- D. A past event occurred but no obligation currently exists
Explanation: Recognition requires a present obligation from a past event, a probable outflow of resources, and a reliable estimate of the amount.
Correct answer: A present obligation exists, outflow is probable, and amount is reliably estimated- A. Debit cash and credit accrued income
- B. Debit income and credit accrued income
- C. Debit accrued income and credit income
- D. Debit accrued expense and credit income
Explanation: Accrued income is a receivable because the business has earned the amount but has not collected it.
Correct answer: Debit accrued income and credit income- A. Rs 10,000
- B. Rs 120,000
- C. Rs 90,000
- D. Rs 30,000
Explanation: The business uses the rented property for three months during the year.
Correct answer: Rs 30,000- A. Profit decreases and a liability increases
- B. Profit increases and a liability decreases
- C. Cash decreases and profit increases
- D. Assets increase and liabilities decrease
Explanation: The estimated warranty cost is charged to the period in which the related sales occur, reducing profit.
Correct answer: Profit decreases and a liability increases- A. Debit expense Rs 25,000 and credit allowance Rs 25,000
- B. Debit expense Rs 10,000 and credit allowance Rs 10,000
- C. Debit allowance Rs 10,000 and credit expense Rs 10,000
- D. Debit receivables Rs 10,000 and credit allowance Rs 10,000
Explanation: The required allowance is 5% of Rs 500,000, or Rs 25,000. Since Rs 15,000 already exists, only the Rs 10,000 increase is charged as…
Correct answer: Debit expense Rs 10,000 and credit allowance Rs 10,00011. A prepaid expense is normally shown in the statement of financial position as which type of item?
- A. An expense representing current consumption
- B. A current liability representing future payment
- C. A current asset representing future benefit
- D. A provision representing an uncertain obligation
Explanation: A prepaid expense is a payment made before the related benefit is consumed, so it represents a future economic benefit.
Correct answer: A current asset representing future benefit- A. Debit expense and credit cash
- B. Debit cash and credit expense
- C. Debit cash and credit prepaid expense
- D. Debit prepaid expense and credit cash
Explanation: The payment creates a prepaid expense asset because the service has not yet been consumed.
Correct answer: Debit prepaid expense and credit cash- A. Consumed but unpaid at the reporting date
- B. Paid and consumed during the same period
- C. Paid but related to a future period
- D. Estimated but unrelated to any obligation
Explanation: An accrued expense has already been incurred because the related goods or services have been received, but payment has not yet been made.
Correct answer: Consumed but unpaid at the reporting date- A. Debit provision Rs 90,000 and credit cash Rs 90,000
- B. Debit warranty expense Rs 90,000 and credit provision Rs 90,000
- C. Debit cash Rs 90,000 and credit warranty income Rs 90,000
- D. Debit provision expense Rs 90,000 and credit inventory Rs 90,000
Explanation: Recognizing the provision records the expected cost in the income statement and the obligation in the statement of financial position.
Correct answer: Debit warranty expense Rs 90,000 and credit provision Rs 90,00015. When an established warranty provision is used to pay a valid claim, which entry is normally made?
- A. Debit warranty expense and credit cash
- B. Debit cash and credit provision
- C. Debit provision and credit cash
- D. Debit inventory and credit warranty income
Explanation: The provision was already charged as an expense when the expected obligation was recognized.
Correct answer: Debit provision and credit cash- A. Prepaid expense
- B. Trade payable
- C. Capital reserve
- D. Contingent liability
Explanation: A contingent liability is a possible obligation whose existence or amount depends on uncertain future events.
Correct answer: Contingent liability- A. Best estimate of the expenditure required to settle it
- B. Original purchase cost of the related asset
- C. Maximum possible loss in every case
- D. Expected profit from avoiding the obligation
Explanation: The measurement of a provision is based on the best estimate of the expenditure needed to settle the present obligation at the reporting…
Correct answer: Best estimate of the expenditure required to settle it- A. Expense Rs 48,000 and prepaid asset nil
- B. Expense Rs 36,000 and prepaid asset Rs 12,000
- C. Expense Rs 12,000 and prepaid asset Rs 36,000
- 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.
Correct answer: Expense Rs 12,000 and prepaid asset Rs 36,000- A. To recognize the expense twice in both periods
- B. To cancel the original expense permanently
- C. To convert the liability into a fixed asset
- D. To prevent the later cash payment from being recorded as expense twice
Explanation: The reversal removes the prior-period accrual so that the subsequent payment can be recorded through the normal expense or payable…
Correct answer: To prevent the later cash payment from being recorded as expense twice- A. Existence or amount and timing of settlement
- B. Payment method and supplier address
- C. Invoice number and purchase order
- D. Currency used for recording the transaction
Explanation: A trade payable is usually supported by an invoice and has relatively certain amount and settlement timing.
Correct answer: Existence or amount and timing of settlementAccruals, Prepayments and Provisions MCQs: common questions
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