Question

On 1st October, 2011, a municipal tax of Rs. 1,000 may be paid for one year. If accounts are made up-to 31st March, 2012, taxes for six months (from 1st April, 2012 to 30th September, 2012), Rs. 500 will be treated as prepaid.
What is the journal entry to record the effect of above transaction ?

• A. Municipal Taxes A/c...........Dr 500
  To Profit and Loss A/c 500
• B. Municipal Taxes A/c...........Dr 500
  To Trading A/c 500
• C. Municipal Taxes A/c...........Dr 500
  To Prepaid Municipal taxes A/c 500
• D. Prepaid Municipal Taxes A/c...........Dr 500
  To Municipal Taxes A/c 500

Answer 1

The correct option is D Prepaid Municipal Taxes A/c...........Dr 500

To Municipal Taxes A/c 500
Prepaid amount is an asset for the firm because that will be proven as a benefit in future. Since prepaid expenses are just like any normal expense, nominal account rule will be applied to it. Debit all the expenses and credit all incomes is the nominal account rule

Thus journal entry for prepaid municipal tax iss

$PrepaidMunicipaltaxa/cDrRs500ToMunicipaltaxa/cRs500$