Question 3.7: Domestic Ltd has reached the end of its reporting period and...
Domestic Ltd has reached the end of its reporting period and has paid for electricity for only the first three quarters of the year (amounting to $1,900).This is simply because the electricity company has only just sent out bills for the quarter that ends on the same date as Domestic Ltd’s year-end. The amount of Domestic Ltd’s bill for this last quarter is $500. In this situation, the amount of the electricity expense outstanding is dealt with as follows:
- Electricity expense in the income statement will include the amount paid, plus the amount of the bill for the last quarter (i.e. $1,900 + $500 = $2,400) in order to cover the whole year.
- The amount of the outstanding bill ($500) represents a liability at the end of the year, and will be included under the heading ‘accruals’ or ‘accrued expenses’ in the statement of financial position. This item would normally have to be paid within 12 months of the year-end, and will, therefore, be treated as a current liability.
- The cash will already have been reduced to reflect the amount ($1,900) paid for electricity during the period.
This treatment will mean that the correct figure for the electricity expense for the year will be included in the income statement. It will also have the effect of showing that, at the end of the reporting period, Domestic Ltd owed the amount of the last quarter’s electricity bill. Dealing with the outstanding amount in this way reflects the dual aspect of the item and will ensure that the accounting equation is maintained.