I am solving an example, which says:
During the year, $4,000 was paid to the electricity board. At the beginning of the year, $1,000 was owed, and
at the end of the year $1,200 was owed?
What is the charge for electricity in the year’s income statement?
– the Electricity expense a/c has an opening balance of $1000 on the credit side, money owed. Why?
Usually the Electricity expense a/c has a debit opening balance, why is that here is a credit? And, usually the Electricity expense a/c is cleared to I/S, so it’s not possible that it’s balance is not 0 at the start of the new period.
I am wondering if the Electricity Expense a/c as they have named in the solution below is actually Electricity payable a/c, because the payable can have a credit opening balance, but here they say it’s an expense not a payables a/c?
This is the T a/c content as given:
Electricity expense account
Cr 1,000 b/d
Cr 4,200 Income statement charge
Dr Cash 4,000
Dr C/d 1,200
Dr 5,200 Cr 5,200
Cr 1,200 B/d
I would appreciate some idea!
Although I will explain the debits/credits afterwards, I think it is quicker and easier without t-accounts.
It is irrelevant how you do your workings – they are not marked – t-accounts only end up wasting time and (sometimes) causing confusion.
They paid cash of $4000, 1,000 of this was paying what was owed from last year, so that leaves $3,000 for this year. We will owe an extra 1200 for this year, which gives a total cost of $4,200.
With regards to the double entry. Electricity does not normally have an opening debit balance. The reason is will have a credit balance at the start of the year is because 1,000 was owing at the end of last year / start of this year (the accrual).
During the year, they pay cash of $4000, so debit electricity $4000. At the end of the year there is an extra $1200 owing, so debit electricity and credit accruals with $1200.
This leaves a ‘missing figure’ on the electricity account of $4,200 which is the expense for the year and is transferred to the income statement a/c.
Thank you very much for the answer, it’s all clear now.
You are welcome
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