Interpreting Year-End Balances for Utility Expenses

Steps:

• Identify the balance date: 1 January, Year 2 marks the start of the new accounting period, carrying forward from Year 1.
• Classify the account: Heat and light is an expense; a credit balance at year-end indicates a liability.
• Apply accrual principle: Expenses are matched to the period incurred, so unpaid amounts at period-end are accrued.
• Conclude representation: The balance reflects unpaid Year 1 expenses due into Year 2.

Why A is correct:

• Under the accrual basis of accounting (IAS 1), a credit balance in an expense account at period-end represents accrued liabilities, defined as outstanding amounts owed for services received.

Why the others are wrong:

• B: Refunds reduce expenses or create income, not a carried-forward balance.
• C: Prepayments are debit balances (assets) for payments made in advance.
• D: Overpayments create receivables, not expense liabilities.

Final answer: A