On reviewing the financial statements, a company’s accountant discovered that an annual rental of £5,000 paid by the company in advance on 30 June Year 2 had been treated in full as an expense for the year ended 31 December Year 2. What will be the effect on the income statement (profit and loss account) and statement of financial position (balance sheet) when the necessary adjustment is made?

(a) Profit will increase by £5,000 and current assets will increase by £5,000.

(b) Profit will decrease by £5,000 and payables (creditors) due within 1 year will increase by £5,000.

(c) Profits will increase by £2,500 and current assets will increase by £2,500.

(d) Profits will decrease by £2,500 and current assets will increase by £2,500.