Accounting Online Program Certification Practice Test

What amount of the charge for insurance will be reported in the statement of profit or loss for the year ended 31 December 20X7?

1. £830

2. £600

3. £700

4. £500

The correct answer is: £830

To determine the amount of the charge for insurance that will be reported in the statement of profit or loss for the year ended 31 December 20X7, it’s crucial to consider how insurance expenses are recognized. Accounting principles dictate that expenses should be recorded in the period in which they are incurred, reflecting the usage of insurance coverage during that time frame. If the insurance policy covers multiple periods and only some of that coverage applies to the period ending 31 December 20X7, it is essential to identify the portion relevant to that specific financial year. The correct amount of £830 indicates that this total aligns with the coverage utilized for the year, possibly including any adjustments, prepayments, or deferred amounts that require accounting recognition accordingly. In contrast, the other amounts provided may not reflect the correct portion of the total insurance expense, either due to underestimations of the coverage applied to the financial year or misallocations of prepaid insurance or unrecognized liabilities. Therefore, £830 accurately represents the insurance expense recognized on the statement of profit or loss for the year, reflecting the principle of matching expenses with the revenues of the period.