Accrual and Prepayment

Expenses are recognized when:

• they contribute to the production of revenue.

• they are paid

• they are billed by the supplier.

• the invoice is received.

The revenue recognition principle dictates that revenue should be recognized in the accounting records:

• when cash is received.

• when it is earned.

• at the end of the month.

• in the period that income taxes are paid.

In a service-type business, revenue is considered earned

• at the end of the month.

• at the end of the year.

• when the service is performed.

• when cash is received.

The expense recognition principle matches:

• customers with businesses.

• expenses with revenues.

• assets with liabilities.

• creditors with businesses.

A flower shop makes a large sale for $1,000 on November 30. The customer is sent a statement on December 5 and a check is received on December 10. The flower shop applies the revenue recognition principle. When is the $1,000 considered to be earned?

• 5 December

• 10 December

• 30 November

• 1 December

A business preparing its financial statements for the year to 31 October each year pays rent quarterly in advance on 1 January, 1 April, 1 July and 1 October each year. The annual rent was increased from £48,000 to £60,000 per year from 1 March 20X4. What figure should appear for rent in the statement of profit or loss for the year ended 31 October 20X4 and in the statement of financial position at that date?

• SOPL: 56,000 and SOFP 10,000

• SOPL: 52,000 and SOFP 5,000

• SOPL: 56,000 and SOFP 5,000

• SOPL: 55,000 and SOFP 10,000

A rent prepayment of £960 was treated as an accrual in a sole trader's statement of profit or loss at the year end. As a result the profit was:

• understated by £960

• understated by £1,920

• overstated by £1,920

• overstated by £960

At 31 December 20X8 Blue Anchor plc has an insurance prepayment of £250. During 20X9 they pay £800 in respect of various insurance contracts. The closing accrual for insurance is £90

The statement of profit or loss charge for insurance for the year ended 31 December 20X9 is:

• 460

• 800

• 960

• 1,140