Scribd Logo
Upload

Welcome to Scribd!

  • 37 views

    12 Accruals & Prepayments

    Uploaded by

    Dayaan A
    The document defines and explains the accounting treatment of accruals and prepayments. Accrued expenses and incomes are expenses and incomes incurred but not yet paid or received. Prepaid expenses and incomes are expenses paid and incomes received in advance. For accruals and accrued incomes, the related expense or income is added in the profit and loss account and shown as a current liability or asset in the balance sheet. For prepayments and prepaid incomes, the related expense or income is subtracted in the profit and loss account and shown as a current asset or liability in the balance sheet. Examples are provided to illustrate the accounting entries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    12 Accruals & Prepayments

    Uploaded by

    Dayaan A
    37 views6 pages
    The document defines and explains the accounting treatment of accruals and prepayments. Accrued expenses and incomes are expenses and incomes incurred but not yet paid or received. Prepaid expenses and incomes are expenses paid and incomes received in advance. For accruals and accrued incomes, the related expense or income is added in the profit and loss account and shown as a current liability or asset in the balance sheet. For prepayments and prepaid incomes, the related expense or income is subtracted in the profit and loss account and shown as a current asset or liability in the balance sheet. Examples are provided to illustrate the accounting entries.

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document defines and explains the accounting treatment of accruals and prepayments. Accrued expenses and incomes are expenses and incomes incurred but not yet paid or received. Prepaid expenses and incomes are expenses paid and incomes received in advance. For accruals and accrued incomes, the related expense or income is added in the profit and loss account and shown as a current liability or asset in the balance sheet. For prepayments and prepaid incomes, the related expense or income is subtracted in the profit and loss account and shown as a current asset or liability in the balance sheet. Examples are provided to illustrate the accounting entries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    37 views6 pages

    12 Accruals & Prepayments

    Uploaded by

    Dayaan A
    The document defines and explains the accounting treatment of accruals and prepayments. Accrued expenses and incomes are expenses and incomes incurred but not yet paid or received. Prepaid expenses and incomes are expenses paid and incomes received in advance. For accruals and accrued incomes, the related expense or income is added in the profit and loss account and shown as a current liability or asset in the balance sheet. For prepayments and prepaid incomes, the related expense or income is subtracted in the profit and loss account and shown as a current asset or liability in the balance sheet. Examples are provided to illustrate the accounting entries.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    You are on page 1of 6

    ACCRUALS AND PREPAYMENTS

    ACCRUALS/ DEFINITION ACCOUNTING


    PREPAYMENTS TREATMENT
    ACCRUED EXPENSES THESE ARE EXPENSES IT IS ADDED IN RELATED
    INCURRED BUT NOT YET EXPENSE IN PROFIT AND
    PAID. FOR E.G. ACCRUED LOSS ACCOUNT.
    SALARIES, ACCRUED IT IS SHOWN AS A
    RENT ETC. CURRENT LIABILTY IN
    BALANCE SHEET.
    ACCRUED INCOMES THESE ARE INCOMES IT IS ADDED IN RELATED
    INCURRED BUT NOT YET INCOME IN PROFIT AND
    RECEIVED.FOR E.G. LOSS ACCOUNT.
    ACCRUED INVEMTMENT IT IS SHOWN AS A
    INCOME, ACCRUED CURRENT ASSET IN
    COMMISSION ETC. BALANCE SHEET
    PREPAID EXPENSES THESE ARE EXPENSES IT IS SUBTRACTED FROM
    PAID IN ADVANCEFOR THE RELATED EXPENSE
    E.G. PREPAID IN PROFIT AND LOSS
    INSURANCE,PREPAID ACCOUNT.
    ADVERTISEMENT COSTS IT IS SHOWN AS A
    ETC. CURRENT ASSET IN
    BALANCE SHEET
    PREPAID INCOMES THESE ARE INCOMES IT IS SUBTRACTED FROM
    RECEIVED IN THE RELATED EXPENSE
    ADVANCE.FOR E.G. IN PROFIT AND LOSS
    PREPAID RENT, PREPAID ACCOUNT.
    INSURANCE ETC. IT IS SHOWN AS A
    CURRENT LIABILTY IN
    BALANCE SHEET
    EXAMPLE 1

    The following is the extract of trail balance of Lamb Limited for the year ended 31-
    12-2018

    Debit ($) Credit ($)


    Salaries 500
    Insurance 200
    Investment income 400
    Rent income 100
    Salaries of $200 are accrued. Insurance of $40 is prepaid. Investment income
    receivable (accrued) is $50. Rent prepaid $10

    Show the profit and loss and balance sheet extracts for the year 31-12-2018

    Answer

    Income statement
    ($)
    Salaries expense ( 500 + 200) 700
    Insurance expense (200 – 40) 160
    Investment income (400 + 50) 450
    Rent income (100 – 10) 90

    Balance sheet
    ($)
    Current assets:
    Prepaid insurance expense 40
    Accrued investment income 50
    Current liabilities:
    Accrued Salaries expense 200
    Prepaid rental income 10
    EXAMPLE 2

    The following is the extract of trail balance of Gooch Limited for the year ended
    31-12-2011

    Debit ($) Credit ($)


    Electricity 5,000
    Insurance 7,000
    Rental income 1,000

    Paid electricity $1,500 on 31-1-2012 for the previous quarter. Insurance cost paid
    on 1-10-2011 covering period of 12 months $1,200. Prepaid rent income $200.
    Show the profit and loss and balance sheet extracts for the year 31-12-2011

    Answer

    Accrued electricity = 1,500 x 2/3 = 1,000

    Prepaid insurance = 1,200/12 = 100 x 9 = 900

    Income statement
    ($)
    Electricity expense (5,000 + 1,000) 6,000
    Insurance expense (7,000 – 900) 6,100
    Rent income (1,000 – 200) 800

    Balance sheet
    ($)
    Current assets:
    Prepaid insurance expense 900
    Current liabilities:
    Electricity payable 1,000
    Prepaid Rent income 200
    EXAMPLE 3 (ASSIGNMENT)

    The following is the extract of trail balance of Gooch Limited for the year ended
    31-12-2011

    Debit ($) Credit ($)


    Electricity 10,000
    Insurance 5,000
    Rental income 500

    Paid electricity $600 on 28-2-2012 for the previous quarter. Insurance cost paid
    on 1-6-2011 covering period of 9 months $ 1,800. Accrued rent income $100.
    Show the profit and loss and balance sheet extracts for the year 31-12-2011

    Answer

    Accrued electricity = 600 x 1/3 = 200

    Prepaid insurance = 1,800/9= 200 x 3 = 600

    Income statement
    ($)
    Electricity expense (10,000 + 200) 10,200
    Insurance expense (5,000 – 600) 4,400
    Rent income (500 + 100) 600

    Balance sheet
    ($)
    Current assets:
    Prepaid insurance expense 600
    Accrued rent income 100
    Current liabilities:
    Electricity payable 200
    EXAMPLE 4 (ASSIGNMENT)

    Answer

    Bad debts & Provisions

    INCOME STATEMENT (£) BALANCE SHEET (£)


    OLD BAD DEBTS 0 DEBTORS( IN TRAIL 167,000
    (IN TB) BALANCE)
    +NEW BAD DEBTS 7,000 - NEW BAD DEBTS (7,000)
    ( IN ADJ)
    + NEW PROVISION (IN 8,000 - NEW PROVISION (8,000)
    ADJ)
    - OLD PROVISION (4,600)
    (IN TB)
    TOTAL DEBTOR EXPENSES 10,400 CLOSING DEBTORS 152,000

    NEW PROVISION = DEBTORS (IN TRAIL) - NEW BAD DEBTS = NET DEBTORS X %age
    167,000– 7,000 = 160,000 X 5 % = 8,000
    Accruals & Prepayments

    Accrued electricity = 4,500/3 =1,500 x 1 = 1,500

    Prepaid rent = 9,000/6 = 1,500 x 4 = 6,000

    Income statement

    (£)
    Electricity expense (10,000 + 1,500) 11,500
    Rent expense (38,000 – 6,000) 32,000

    Balance sheet

    (£)
    Current assets:
    Prepaid rent expense 6,000
    Current liabilities:
    Electricity payable 1,500

    You might also like