Accounting Online Program Certification Practice Test 2025 - Free Certification Practice Questions and Study Guide

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How much was the profit overstated as a result of treating a gas accrual as a prepayment?

Overstated by £800

When a gas accrual is incorrectly treated as a prepayment, it means that the necessary expense related to the gas consumption is not recognized in the accounting period it is incurred. Instead, it is recorded as an asset, which leads to an understatement of expenses for that period.

In this instance, if the gas cost that should have been recognized as an expense was £800, and it was instead recorded as a prepayment, the profit would be overstated by the same amount of £800. By not reflecting the expense against revenues, the financial statements present a more favorable picture of profitability than is accurate.

Understanding this concept is crucial in accounting, as it emphasizes the importance of accurately matching expenses to the revenues they help generate, in line with the matching principle. This principle ensures that financial statements provide a true representation of a business's performance during a specific period.

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Understated by £400

Unchanged

Overstated by £600

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