Multiple choice

A proprietor, Mr. X has reported a profit of Rs. 1, 00, 000 at the end of the financial year after taking into consideration the following amounts.

(i) The cost of an asset of Rs. 10, 000 has been taken as an expense. (ii) Mr. X is anticipating a profit of Rs. 5, 000 on the future sale of a car shown as an asset in his books. (iii) Salary of Rs. 200 payable in the financial year has not been taken into account. (iv) Mr. X purchased an asset for Rs. 50, 000 but its fair value on the date of purchases was Rs. 60, 000. Mr. X recorded the value of asset in his books at Rs. 60, 000

On the basis of the above facts answer the following question from the given choices: Which concept should be followed in statement (iii)?

  1. Materiality

  2. Historical cost

  3. Current cost

  4. Accrual
Reveal answer Fill a bubble to check yourself
D Correct answer
Explanation

Statement (iii): Salary of Rs. 200 payable in the financial year has not been taken into account. The accrual principle requires that expenses be recognized when they are INCURRED, not when cash is paid. Since the salary was earned by employees in the financial year (service was provided), it is an expense of that year regardless of when it's actually paid. Mr. X should accrue this expense - record Rs. 200 as salary expense and create a liability (outstanding salary). Materiality (A) might argue that Rs. 200 is too small to matter, but accrual still applies even for small amounts. Historical cost (B) and Current cost (C) relate to asset valuation, not expense recognition. Therefore, Accrual (D) is the correct concept.

Keep practicing — related questions