Accounting Online Program Certification Practice Test

What adjustment must be made to Krim plc’s administrative expenses ledger account for the local property tax?

1. £6,495

2. Cr 4,330

3. Dr 2,165

4. Cr 4,330

The correct answer is: Cr 4,330

To determine the appropriate adjustment to Krim plc’s administrative expenses ledger account for the local property tax, it is essential to consider the nature of the tax and how it impacts the financial statements. Administrative expenses typically include costs that are necessary for the general administration of a business, including items like property taxes. When an entity needs to adjust its expenses for property tax, it will usually involve a credit (Creditor) entry in the ledger to reflect the amount that is being recognized as an expense against revenues of the organization. This is because the property tax payment reduces the overall expense, signaling that a portion of the liabilities has been settled or is being recognized. In this case, the figure of £4,330 signifies that this specific amount must be credited to the administrative expenses account, implying that it has not yet been accounted for entirely. This correct figure aligns with standard practice in accounting, where credits reduce the total expense account balance, thereby accurately reflecting the company's financial health in terms of its obligations and expenses. Thus, making this adjustment ensures that the financial statements present a true and fair view of the company's administrative expenditures in relation to the local property tax obligation.