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Dear Sir,
please help me to understand the answer to this question:
X owns a small shop and the following information concerns the heat and light account for the year to 31 March 2017:
At 31 March 2016: $1000 – prepayment for gas; $500 accrual for electricity
At 31 March 2017: $2000 – accrual for gas; $1200 prepayment for electricty.Also, during the year, X made payments of $5000 for gas and $7800 for electricity.
What is the total heat and light expense for the year ended 31 March 2017?
Answer:
Gas prepayment 1 April 1000
Electricty accrual 1 April 2016 (500)
Gas paid during the year 5000
Electricity paid during the year 7800
Gas accrual 1 April 2017 2000
Electricity prepayment 1 April 2017 (1200)Total expense 14 100
The total cash paid during the year was 5,000 + 7,800 = 12,800.
This must include payment of the amount that was owing at the start of the year, but this is not a cost of this year (it was a cost of last year). So we subtract the 500.
It does not include the prepayment at the start of the year because it was paid last year. However it is an expense of this year, so we add the 1,000.The cash paid does not include the amount owing at the end of the year, but this is an expense of this year. So add the 2,000.
The cash paid does include the prepayment at the end of the year – it was paid this year but is an expense of next year, not this year. So subtract the 1,200.Therefore the total expense for this year is 12,800 – 500 + 1,000 + 2,000 – 1,200 = 14,100.
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