ACCOUNTING

CHAPTER 9
ACCRUALS AND PREPAYMENTS

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TOPIC LIST
1. The principle behind accruals and prepayments
2. Accruals
3. Prepayments
4. Accounting for accruals and prepayments
5. The accrual principle and income
6. Accruals, prepayments, advances and arrears
and the TB

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1. THE PRINCIPLE BEHIND ACCRUALS AND
PREPAYMENTS
 The accrual principle requires that we match
expenses with the revenue generated by them
 We sometimes therefore need to carry forward
actual expenditure to a subsequent period (a
prepayment), or account for expenditure incurred
before it is actually paid for (an accrual)

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2. ACCRUALS
To set up an accrual
DEBIT Expense (SPL) £X
CREDIT Accrual (liability on SFP) £X

Worked example, interactive question p.226

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3. PREPAYMENTS
To set up a prepayment
DEBIT Prepayment (asset in SFP) £X
CREDIT Expense (SPL) £X

Worked example p.227

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4. ACCOUNTING FOR ACCRUALS AND
PREPAYMENTS

Recording accruals and prepayments

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4. ACCOUNTING FOR ACCRUALS AND
PREPAYMENTS

Reversing accruals and prepayments

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5. THE ACCRUAL PRINCIPLE AND INCOME

 Accrued income arises when receipt of income

(such as rent or subscription) is in arrears at the
year end
 Deferred income arises when income has been
received in advance at the end of the reporting
period, so it needs to be carried forward and treated
as income of the following reporting period.

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5. THE ACCRUAL PRINCIPLE AND INCOME

 Accounting for accrued income

DEBIT Accrued income (asset in SFP) £X
CREDIT Other income (SPL) £X
 Accounting for deferred income:
DEBIT Revenue or other income (SPL) £X
CREDIT Deferred income (liability in SFP) £X

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6. ACCRUALS, PREPAYMENTS, ADVANCES
AND ARREARS ON THE ETB
1) Calculate amount accrued/prepaid items
2) Prepare adjustment journals
3) Enter journals in adjustment column in TB
4) Cross-cast
5) Enter closing journals
6) Prepare reversal of accrued/prepaid items

Worked example p.238

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QUESTION
A business has paid £10,400 of insurance premiums
during the year ended 31 March 20X7. At 1 April
20X6 there was an insurance prepayment of £800
and at 31 March 20X7 there was a prepayment of
£920. The insurance charge in the statement of
profit or loss for the year ended 31 March 20X7 is:
A £8,680
B £10,280
C £10,400
D £10,520

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QUESTION
A business has paid £10,400 of insurance premiums
during the year ended 31 March 20X7. At 1 April
20X6 there was an insurance prepayment of £800
and at 31 March 20X7 there was a prepayment of
£920. The insurance charge in the statement of
profit or loss for the year ended 31 March 20X7 is:
A £8,680
B £10,280
C £10,400
D £10,520

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QUESTION
Question 39 page 80 (QB)

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End of Chapter 9
Thank you!

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