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Chapter 10:
Accruals and Prepayments
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What you will learn?

 Definition of Accruals and Prepayment

 Recognition

 Practice
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Definition
Accruals

Accruals (or accrued expenses) are expenses incurred but

invoices have not yet been received and so they have not
yet been paid for

Example:

- Utilities: Electricity, Water,…

- Wages incurred, for which payment to employees has

not yet been made

- Interest on loans, for which no lender invoice has yet

been received

Accruals are shown in the SOFP as a liability.

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Definition
Prepayments

Prepayments (prepaid expenses) are payments which

have been paid in one accounting period, but should not
be charged against profit until a later period, because
they relate to that later period.

Example:

- Rental charges

- Insurance premium

Prepayments are shown in the SOFP as an asset.

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Recognition
Accruals

Method 1

Period 1:

Accounting for unbilled expenses at end period

DR Expenses

CR Accrual (Liability)

Period 2:

Accounting for payment of expenses in the period

DR Accrual (Liability)

CR Cash

DR/CR Expenses (Under/over accrual)

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Recognition
Accruals

Method 2

Period 1: Period 2:

Accounting for unpaid expenses 1. Accounting for payment of

at end of each accounting period expenses in the period

DR Expenses DR Expenses

CR Accrual (Liability) CR Cash

2. Accounting for reversal of accrual

made in the previous period

DR Accrual (Liability)

CR Expenses

3. Accounting for unbilled expense

at end period (same as Period 1)

DR Expenses

CR Accrual (Liability)
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Recognition
Example: Accruals

At 1/1/20X6, ABC Co signed a contract to rent an office at $500 per

month with payment in arears in 7 months interval at end of each
interval. The company prepares the account bi-annually.

Method 1

Period 1:
30/6: Accural rental expenses for 6 months (Jan to Jun)
DR Expenses 3,000
CR Accruals (Liability) 3,000
Period 2:
31/7: Pay for 7 months rent (Jan to Jul)
DR Accruals 3,000
DR Rental Expenses 500
CR Cash 3,500
31/12: Accrual 5 months rent (Aug to Dec)
DR Rental Expense 2,500
CR Accrual 2,500
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Recognition
Example: Accruals

At 1/1/20X6, ABC Co signed a contract to rent an office at $500 per

month with payment in arears in 7 months interval at end of each
interval. The company prepares the account bi-annually.

Method 2
Period 1:
30/6: Accural rental expenses for 6 months (Jan to Jun)
DR Expenses 3,000
CR Accruals (Liability) 3,000
Period 2:
31/7: Pay for 7 months rent (Jan to Jul)
DR Accruals 3,500
CR Cash 3,500
31/12: Reverse accruals made in the previous period
DR Accrual (Liability) 3,000
CR Rental expense 3,000
31/12: Accrual 5 months rental expense (Aug to Dec)
DR Rental expense 2,500
CR Accrual 2,500
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Recognition
Prepayments

Method 1

Period 1:

Accounting for payment of prepaid expense in the period

DR Prepayment (Asset)

CR Cash

Period 2:

Accounting for allocation of prepayment to expenses in the

period at end period

DR Expenses

CR Prepayment (Asset)
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Recognition
Prepayments

Method 2

Period 1: Period 2:

1. Accounting for payment of 1. Accounting for reversal of

prepaid expense in the period prepayment made in the previous
period
DR Expenses
DR Expenses
CR Cash
CR Prepayment
2. Accounting for outstanding
prepayment at end period 2. Accounting for outstanding
prepayment at end period
DR Prepayment
(Asset) DR Prepayment (Asset)

CR Expenses CR Expenses
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Recognition
Example: Prepayments
At 1/1/20X8, ABC Co signed a contract to rent an office at $500 per
month with payment in advance in 7 months at beginning of each
interval. The company prepares the account bi-annually.

Method 1

Period 1:
1/1: Pay 7 months rent (Jan to Jul)
DR Prepayment 3,500
CR Cash 3,500
30/6: Accounting for allocation of prepayment for 6 months to
expense in the period
DR Rental expense 3,000
CR Prepayment 3,000
Period 2:
1/8: Pay 7 months rent (Aug 20X8 to Feb 20X9)
DR Prepayment 3,500
CR Cash 3,500
31/12: Accounting for allocation of prepayment for 6 months to
expense in the period (Jul to Dec)
DR Rental Expense 3,000
CR Prepayment 3,000
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Recognition
Example: Prepayments
At 1/1/20X8, ABC Co signed a contract to rent an office at $500 per
month with payment in advance in 7 months at beginning of each
interval. The company prepares the account bi-annually.

Method 2
Period 1:
1/1: Pay 7 months rent (Jan to Jul)
DR Prepayment 3,500
CR Cash 3,500
30/6: Accounting for outstanding prepayment at end period
DR Prepayment 500
CR Expense 500
Period 2:
1/8: Pay 7 months rent (Aug 20X8 to Feb 20X9)
DR Prepayment 3,500
CR Cash 3,500
31/12: Accounting for reversal of prepayment made in previous period
DR Expense 500
CR Prepayment 500
31/12: Accounting for outstanding prepayment at end period
DR Prepayment 1,000
CR Rental Expense 1,000
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Practice
Accruals

A company pays rent quarterly in arrears on 1 Jan, 1 Apr, 1 July

and 1 Oct each year. The rent was increased from $90,000 per year
to $120,000 per year as from 1 Oct 20X7.
What rent expense and accrual should be included in the
company’s financial statement for the year ended 31/1/20X8
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Practice
Accruals

A company pays rent quarterly in arrears on 1 Jan, 1 Apr, 1 July

and 1 Oct each year. The rent was increased from $90,000 per year
to $120,000 per year as from 1 Oct 20X7.
What rent expense and accrual should be included in the
company’s financial statement for the year ended 31/1/20X8

Feb Oct Nov Dec Jan

20X7 20X8
$7,500/month $10,000/month
(90/12) (120/12)

 Rent expense = $7,500 x 8 + $10,000 x 4 = $100,000

 Accrual = $10,000 (rent expense for Jan 20X8)
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Practice
Prepayment

EDF Co prepares its financial statements for the year to 30/4 each
year. The company pays rent for its premises quarterly in advance
on 1 Jan, 1 Apr, 1 Jul and 1 Oct. The annual rent was $84,000 per
year until 30/6/20X7. It was increased from that date to $96,000
per year.
What rent expense and end of year prepayment shoulde be
included in the financial statements for the year ended
30/4/20X8.
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Practice
Prepayment

EDF Co prepares its financial statements for the year to 30/4 each
year. The company pays rent for its premises quarterly in advance
on 1 Jan, 1 Apr, 1 Jul and 1 Oct. The annual rent was $84,000 per
year until 30/6/20X7. It was increased from that date to $96,000
per year.
What rent expense and end of year prepayment shoulde be
included in the financial statements for the year ended
30/4/20X8.

Apr Jul Apr

20X7 20X8
$7,000/month $8,000/month
(84/12) (96/12)

 Rent expense = $7,000 x 2 + $8,000 x 10 = $94,000

 Prepayment = $8,000 x 2 = $16,000 (pay for May and
Jun 20X8)
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Practice
Exam focus point 1

A company has sublet part of its offices and in the year ended
30/11/20X9 the rent receivable was:
Until 30/6/20X9 $8,400 per year
From 1/7/20X3 $12,000 per year
Rent was paid quarterly in advance on 1 January, April, July and
October each year.
What amounts of rent receivable and sundry payables should
appear in the company’s financial statements for the year
ended 30/11/20X9?

A. $9,900 and $2,000 B. $9,900 and $1,000

C. $10,200 and $1,000 D. $9,900 and $2,000

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Practice
Exam focus point 1

B. $9,900 and $1,000

$
Statement of profit or loss
December to June 8,400 x 7/12 4,900
July to November 12,000 x 5/12 5,000
9,900