FUNDAMENTALS OF ACCOUNTING – ACT001

UNIT 5 – ACCRUALS AND PREPAYMENTS

Adjustments for the Trading, Profit and loss account

The accounting language for not paying on time is known as accruals while payment in
advance is known as prepayments.

Expenses Accrued (Owings/outstanding/in arrears)

These are expenses which are due for payment by the business, but are either not paid
in part or in full. Accrued expenses are for services used up by the business, but are not
yet paid for. Example, rent for the year is $5000. The business paid only $3 500 for the
year, therefore, rent accrued is $1 500.

Assuming the business made a profit of $9 000, the profit and loss account would
appear as follows:

Profit and Loss (Extract)

Gross Profit 9 000

Expenses accrued are
Less Expenses liabilities and are
Rent 3 500 entered with the
current liabilities in
Add Accruals 1 500
the balance sheet
5 000
Net Profit 4 000

Expenses prepaid

These are expenses that are paid for in advance. Example, insurance for the year
amounted to $3 000, however the business paid a total of $4 000. Insurance prepaid is
$1 000. Assuming the business made a profit of $8 000, the profit and loss account
would appear as follows:

Profit and Loss (Extract)

Gross Profit 8 000 Expenses prepaid are

assets and are
Less Expenses entered with the
Insurance 4 000 current assets in the
Less prepayment 1 000 balance sheet.
3 000
Net Profit 5 000
Revenue Accrued

This is income earned by the business, but is not yet collected. Example, rent received
for the year amounted to $4 000, but the business has collected only $3 500. Rent
received accrued is therefore $500. In the profit and loss account, the amount
outstanding must be added to the amount collected

Rent received 3500

Add accruals 500
4000

Revenues accrued are assets and are entered with the current assets in the balance
sheet.

Revenue Prepaid

This is income not yet earned by the business, but has been collected in advance.
Example, commission received for the year amounted to $7 000, however the business
collected $8 500. Commission received prepaid is therefore $1 500. In the profit and
loss account, the amount collected in advance must be subtracted from the amount
actually collected

Com Received 8500

Less prepayment 1500
7000
Revenues prepaid are liabilities and are entered with the current liabilities in the
balance sheet.

To Summarize

In Profit and Loss:

Add accruals
Less Prepayment

In Balance Sheet:

Expense accrue - liability

Revenue accrue - asset
Expense prepaid - Asset
Revenue prepaid - liability
Task 1
From the following information prepare the profit and loss account of A Rollins for the
year ended 31 December 2005.

Gross profit $108000, rent 2500, Discount received $25, Salaries $610, Motor expenses
$550, Rent received $105, Motor van $2000, General expenses 2100, and Commission
received $820.

Adjustment
1. Expenses owing: Rent $170, Insurance 218
2. Expenses prepaid: General expenses $85, Salaries $47
3. Rent received outstanding $810, Commission received prepaid $300

A Rollins
Profit and Loss Account for the year ended 31 December 2005

Task 2

From the following information prepare the profit and loss account of C Gooden for the
year ended 31 December 2005.

rent 380, Discount received $621, Wages $650, Insurance $980, Rent received $438,
Motor van $55000 Gross profit $68210,Provision for depreciation on motor vans $5000,
Fixtures $6000 General expenses 35, Commission received $800

Adjustment
1. Expenses owing: Wages $350, Insurance $50
2. Expenses prepaid: General expenses $255
3. Rent received outstanding $62, Commission received prepaid $150
4. Depreciate motor van at 10% per annum using reducing balance method, and
fixtures at 5% per annum on cost

Task 3

The following is the Trial balance for John Colombo as at 31 December 2018.
Dr $ Cr $
Cash in hand 1 726
Cash at bank 9 089
Capital 53 600
Purchases 174 816
Sales 222 605
Returns Inwards 3 725
Returns Outwards 8 266
Debtors 4 950
Creditors 8 167
Furniture and Fittings 15 600
Equipment 20 500
Premises 180 400
General Expenses 4 775
Salaries 9 320
Telephone charges 2 160
Drawings 6 626
Postage 4 424
Mortgage 173 000
Rent Received 800
Electricity 2 944
Office expenses 2 648
Carriage Inwards 4 643
Warehouse Expenses 8 248
Stock at 1 January 2018 9 044
Discount Received 2 100
Carriage Outwards 2 900
_______ _______
468 538 468 538
 
Additional Information:

Stock at 31 December 2018 is $10580

General expenses paid in advance $775
Salaries accrued $680
Rent received owing $550
Electricity prepaid $ 444
Office expenses outstanding $352
 
Required:
 
Prepare the income statement and statement of financial position (balance sheet) for the period
ended December 31, 2018

Task 4 – Assignment
From the following trial balance of R. Fraser, draw up a trading and profit and loss
account for the year ended December 31, 1999 and a balance sheet as at that date.

DR CR
$ $
Stock at January1, 1999 3540  
Purchases and sales 25360 40830
Returns inwards 830  
 Returns outwards   1360
Carriage inwards 500  
Carriage outwards 800  
Rent and rates 3100  
Salaries and wages 8300  
General expenses 1200  
Motor expenses 1040  
Bank interest paid 550  
Bank overdraft   3480
Debtors 4250  
Creditors   2115
furniture and fittings 5300  
Motor vehicle 8000  
Cash in hand 250  
Drawings 2500  
Capital   17735
65520 65520

Additional Information:
1. Stock at December 31, 1999 was valued at $4000
2. Motor expenses accrued $160
3. Wages and salaries prepaid $1300
4. Rent and rates in arrears $900
5. General expenses prepaid $200