CHAPTER 8 – LECTURE NOTES –

Accruals and Prepayments

truongthihanhdung@uel.edu.vn
Overview

Accruals &
Prepayments

Expenses Income
Overview
 The accrual basis requires that we match expenses with the revenue
generated by them.
 An accrued liability/expenses (accruals) (khi ghi nợ dồn tích đồng thời
cũng ghi đối ứng là các khoản chi phí dồn tích): is a financial obligation a
company incurs during a given period, for which invoices have not yet been
received and has not yet paid for in that period.
 Examples: accrued wages payable, accrued sales tax payable, and accrued
rent payable…
 Accrued income: (thu nhap don tich) (other receivables) arises when
receipt of income is in arrears at the year end (payment later)
 Examples: Accrued interest income, accrued service income

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Overview
 Prepayments:
 Prepayments (prepaid expenses): Expense which have been paid for in one
reporting period, but are not charged (booked/recognised/recorded) against profit
until a later period, because they are relate to that later period
 Prepayments in this course could be: Prepayments for rent (Prepaid rent),
Prepayments for insurance (Prepaid insurance), Prepayments for utilities (Prepaid
utilities)… In general, they simply call “Prepayments”
 Deferred income (thu nhap hoan lai)/(UNEARNED REVENUES) arises when
income has been received in advance at the end of the reporting period
 Deferred interest income, Deferred rent income, Deferred subscription income…or
simply “Deferred income”.

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REMINDER: Guidance in VAS & US GAAP
Regional Accounting treatments for prepayments
regulations and Accruals
VAS Prepayments:
N242/ C 111
N 641/ C242
Accruals:
N 622/ C335
US GAAP Expenses Prepayments: Revenues prepayments:
(Principles of At time of payment: At Time of payment:
Accounting) Dr Prepaid Insurances 1,000 Dr Cash 1,000
Cr Cash 1,000 Cr Unearned revenues 1,000
At year end: adjusting or allocating entry: At year end: adjusting or allocating entry:
Dr Insurance ex 200 Dr Insurance ex 200
Cr Prepaid insurances 200 Cr Prepaid insurances 200
Expenses Accruals: entries will be booked Revenue Accruals: entries will be booked
at year end for accrued expenses: at year end for accrued revenues:
Dr Salaries ex/Cr Salaries payables( Accruals) Dr Interest receivables/Cr Interest revenues
Dr Interest ex/ Cr Interest payables Dr TR/Cr Sales revenues
Accruals in this course

Accruals Year end (31/12/x1) 1/1/x2 (reversing Cash payment/ receipt Result in FSs?
entries) date
Accrued Dr Expenses (SPL) 100 Dr Accruals 100 Dr Expenses 500 Expenses year 1, year 2?
expenses Cr Accruals (SFP) 100 Cr Expenses 100 CR Cash 500 Liabilities on SFP at year end 1
and year end 2?
Accrued DR Accrued income Dr Receivables 100 Next year sales: Revenues year 1, year 2?
income (asset in the SFP) (138- Cr Accrued income 100 Dr Receivables 500 Assets on SFP at year end 1
Other receivables) 100 (special case of reversing Cr Sales 500 and year end 2?
CR Sales/Other income entries, use Receivables as Cash payments:
(SPL) 100 intermediate account as it Dr Cash 600
reflects the relationship Cr Receivables 600
with customers)

Note: Accruals = Accrued liability in this course

Do not confuse Accruals (chapter 9) with Accrual basis (chapter 1)!
Prepayments in this course
Prepayments Cash payment/ Year end (31/12/x1) 1/1/x2 (reversing Result in FSs?
receipt date entries)

Prepaid Dr Expenses (SPL) Dr Prepayments 50 Dr Expenses 50 Expenses year 1, year 2?

Expenses 100 Cr Expenses 50 CR Prepayments 50 Assets (Prepayments) on SFP at
Cr Cash(SFP) 100 year end 1 and year end 2?
Deferred DR Cash 1.000 AT year end, let’s say 1/1/x2: Reversing: Revenues year 1, year 2?
income Cr Sales 1.000 finishing 60% contract: Dr Deferred income 400 Liabilities (deferred income) on
Dr Sales 400 Cr Receivables 400 SFP at year end 1 and year
(unearned
Cr Deferred income 400 When finishing 100% end 2?
revenues/ (unearned revenues) contract:
Prepaid Dr Receivables 400
revenues) Cr Sales 400

• Why do we have to reverse Accruals and Prepayments?

 So we don’t omit the expenses in this period or double the expenses of the new period.
Example 1

1/3/x6 31/5 30/8 31/11 28/2/x7

1/4/x6

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Example 2

1/1/x2 1/4 1/7 1/10 31/12

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Example 2

1/1/x4 31/3 30/6 30/9 31/12

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Example 3

6 months
1/1/x6 1/7/x6 31/12/x6

12 months

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Example

Compute the prepayment of insurance in the SFP at 28/2/x7 and 28/2/x8?

28/2/x6 1/6 28/2/x7 1/6 28/2/x8

9 months 9 months

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Example

1/8/x4 31/8 1/11 1/2/x5 1/5 1/8 31/8/x5 1/11

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Example 4

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Example

Understand:
Brought fw: brought the balance fw to this period.
Carry fw: carry balance fw to next period.

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Accrual income vs Accounts receivable

 Accrual income: is money the amount your company has

earned but hasn't yet billed the customer for
 Accounts receivable represents revenue that has been
both earned and billed but not yet received

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T-accounts for in advances and in arrears
(kinda bisexual account)

SUBSCRIPTION RECEIVABLES
Opening arrears Opening advances

Annual income Cash received in year

Irrecoverable amounts

Closing arrears Closing advances

Textbook guidance

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Example 6

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Solution

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Solution
Note a/
 Receive cash in advance: Dr Cash/Cr Sales 2,380
 30/6/x6: Dr Sales/Cr Deferred income 2,380
 1/7/x6: Dr Deferred income/Cr Subscription receivables 2,380 (reversing)
 During the year X7 recognize cash received:
Dr Cash/Cr Subscription receivables 23,620
 4 mems in arrears paid at 30.6.x7: DR Cash/Cr Subscription receivables 400
Note b/
 30/6/x6 (Accrued income paid in arrears):Dr Accrued income/Cr Sales 4,840
 1/7/x6: Dr Subscription receivables/Cr Accrued income 4,840
 Annual income during x7 (200mems x£100):
Dr Subscription Receivables/Cr Sales revenues 20,000
 They ask how many mems paid in advance for the year X8 (£120 annually)?
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Solution
Subscription receivables
1.7.x6 Arrears (reversing entries) 4,840 1.7.x6 Advances (reversing entries) 2,380

30.6.x7 Annual income 20,000 (200 memsx100) Collect, cash at bank 23,620

30.6.x7 4 mems in arrears paid 400

24.840 26.400
1.560
(cr balance means Advances = 1,560)

Credit balances nghia la dang nhan tien cao hon phan doanh thu
da ghi nhantu do suy ra co bao nhieu nguoi dang tra truoc!
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Find our own way to solve the case
WE ARE THE DRONE CLUB, WE INCURRED SUBSCRIPTION REVENUES
Unearned revenues (cash paid
in advances)
Subscription Income Cash
2.380
A A C C

X?????

Cash paid in arrears

Subscription Income (RECEIVABLES) Cash
4.840 YEAR END: June 30, X7
B B D D opening balance on July 1, X6

Cash receipts for the year: C + D = 23.620

Income incurred: A+B = 200 mems x $100 = 20.000

(4memsx$100) We have: 2,380 + C - A = X (1)

400 4,840 + B - D = 400 (2)
Then: (2)-(1) = 4,840 - 2,380 + (B+A) - (D+C) = 400 - X ==> X = 1,560
Example 7

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Homework

Self test textbook chap 9

Testbank chap 9

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Example 5

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Solution
1/At the time of receive cash in X4: Dr Cash /Cr Sales 1,200+X
31/12/x4
Dr Sales 1,200
Cr Deferred income (liability) 1,200 (other payables)
1/1/x5:
Dr Deferred income 1,200
Cr Trade receivables? 1,200 (used intermediate account: TR)
Feb/x5 when all invoices finished:
Dr Trade receivables 1,200
Cr Sales 1,200
---- Cash received in X4 and unchanged
--- TR is intermediate account in this case
- reflect Rev of X4 is X, and Rev of X5 is 1,200.

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Solution
b/At the time of purchasing in X4:
Dr Purchases y+500
Cr Cash y+500 exceeding/surplus
At 31/12/x4:
Dr Accrued income (asset) 500 (other receivables)
Cr Purchases 500
1/1/x5:
Dr Trade payables 500 (TP an intermediate account)
Cr Accrued income 500
During Jan/x5 when receive refund in cash:
Dr Cash 500
Cr Trade payables 500
-- we try to reflect the accurate Purchases ex for X4 is Y and a refund of 500 in X5

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Testbank 9
Testbank 9