Professional Documents
Culture Documents
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LEARNING OBJECTIVES
Identify the accounting principles behind accruals and prepayments;
Identify the correct figures in the statement of profit or loss for income and
expenses;
Specify how the initial trial balance should be adjusted to reflect year-end
accruals and prepayments. 2
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
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2. ACCRUALS
Accruals are expenses incurred but not yet paid
To set up an accrual:
DEBIT Expense (SPL) £X
CREDIT Accrual (liability on SFP) £X
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2. ACCRUALS
WORKED EXAMPLE:
Horace Goodrunning ends his motor spares business’s reporting period on
28 February each year. His telephone was installed on 1 April 20X6 and he
receives his telephone bill quarterly at the end of each quarter. We need to
calculate the telephone expenses to be charged to the statement of profit
or loss for the year ended 28 February 20X7.
Telephone expense for the three months ended: (£)
30.6.20X6: 23.50
30.9.20X6: 27.20
31.12.20X6: 33.40
31.3.20X7: 36.00
All the bills were paid on the final day of each three-month period.
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2. ACCRUALS
INTERACTIVE QUESTION 1:
Cleverley started in business as a paper plate and cup manufacturer on 1
January 20X2, preparing financial statements to 31 December 20X2. He is
not registered for VAT. Electricity bills received in respect of charges for the
previous quarter were as follows: (£)
20X2 20X3
31 January - 491.52
30 April 279.47 400.93
31 July 663.80 700.94
31 October 117.28 620.00
Requirement:
What is the electricity expense for the year ended 31 December 20X2?
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3. PREPAYMENTS
Prepayments are payments for expenses for that are
not yet incurred.
To set up a prepayment:
DEBIT Prepayment (asset in SFP) £X
CREDIT Expense (SPL) £X
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3. PREPAYMENTS
WORKED EXAMPLE:
A business opens on 1 January 20X4 in a shop where the rent is
£20,000 per year, payable quarterly in advance at the beginning of
each three month period. Payments were made as follows: (£)
1 January 20X4 5,000
31 March 20X4 5,000
30 June 20X4 5,000
30 September 20X4 5,000
31 December 20X4 5,000
Requirement:
What is the rental expense for the year ended 31 December 20X4
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4. ACCOUNTING FOR ACCRUALS AND PREPAYMENTS
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4. ACCOUNTING FOR ACCRUALS AND PREPAYMENTS
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5. THE ACCRUAL PRINCIPLE AND INCOME
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5. THE ACCRUAL PRINCIPLE AND INCOME
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5. THE ACCRUAL PRINCIPLE AND INCOME
WORKED EXAMPLE: DEFERRED AND ACCRUED INCOME
Sunrise Carpets sells floor coverings to the public. At the end of its 12-month
reporting period, 31 December 20X4, it has recovered as sales £1,200
received from customers as deposits on carpets which are not due to be
invoiced until February 20X5. In January 20X5 it records a £500 refund from
one of its main suppliers as a result of exceeding the agreed level of custom
during 20X4.
Requirement:
(a) Recording these transactions in the ledger accounts for the reporting
period ended 31/12/20X4.
(b) Recording these transactions in the ledger accounts for the reporting
period ended 31/12/20X5. 14
5. THE ACCRUAL PRINCIPLE AND INCOME
WORKED EXAMPLE: DEFERRED AND ACCRUED INCOME
(a) At 31/12/20X4
- Deposits from customers:
DR Sales 1,200
CR Deferred income 1,200
- Refund from supplier:
DR Accrued income 500
CR Purchases 500
(b) At 31/12/20X5
- Reversal of deferred income:
DR Deferred income 1,200
CR Trade receivables 1,200
- Reversal of accrued income:
DR Trade payables 500
CR Accrued income 500 15
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
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6. ACCRUALS, PREPAYMENTS, ADVANCES
AND ARREARS ON THE ETB
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6. ACCRUALS, PREPAYMENTS, ADVANCES
AND ARREARS ON THE ETB
WORKED EXAMPLE: ACCRUALS AND PREPAYMENT AND THE TB
She needs to take account of the following matters:
(a) Her quarterly power bills are £822. The last bill she paid was in respect of
the quarter ending 31/10/20X1.
(b) Her annual rent bill of £2,970 was paid on 01/05/20X1 in respect of the
year to 30/04/X2.
(c) Sales include £350 received from cash customers in December in respect
of items of clothing that Jezebel will complete in January 20X2.
(d) A royalty of £58 is due from a fashion magazine which used Jezebel’s
products in a fashion shoot. Jezebel wishes to account for this as
other/accrued income rather than trade receivables.
Process the necessary adjustments against the initial trial balance. 18
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. D £10,520
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EXAMPLE:
Woodworks, Inc. is a furniture manufacturer and retailer. You are
closing the books of the company for the year ended 30 June 20X0.
Suggest appropriate accounting treatment for the
following transactions:
The company paid salaries of £70,000 for June 20X0 on 4 July
20X0. Total salaries for the year 20X0 do not already include this
figure.
On 5 July 20X0, the company received utility bills totaling
£30,000.
Annual rent of £100,000 on Outlet A was paid on 1 January 20X0
and it was recorded as prepaid rent.
Semi-annual rent of £30,000 on Outlet B was also paid on 1 April
20X0 and the whole amount was charged to the P/L.
On 30 June 20X0, £50,000 was paid on account of 5-year
premium membership of relevant business association. 21
QUESTION BANK: Q1
SOPL SOFP
A 56,000 10,000
B 52,000 5,000
C 56,000 5,000
D 55,000 10,000
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QUESTION BANK: Q2
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QUESTION BANK: Q6
A company receives rent for subletting part of its office block. Rent,
receivable quarterly in advance, is received as follows:
Date of receipt Period covered £
1 October 20X1 3 months to 31 December 20X1 7,500
30 December 20X1 3 months to 31 March 20X2 7,500
4 April 20X2 3 months to 30 June 20X2 9,000
1 July 20X2 3 months to 30 September 20X2 9,000
1 October 20X2 3 months to 31 December 20X2 9,000
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QUESTION BANK: Q7
During 20X4, Bibi paid a total of £60,000 for rent, covering the period
from 1 October 20X3 to 31 March 20X5.
What figures should be included in the financial statements for the
year ended 31 December 20X4?
SOPL SOFP
A £40,000 £10,000 Prepayment
B £40,000 £15,000 Prepayment
C £50,000 £10,000 Accrual
D £50,000 £15,000 Accrual
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QUESTION BANK: Q15
An organisation's year end os 30 September. On 1 January 20X6 the
organisation took out a loan of £100,000 with annual interest of 12%. The
interest is payable in equal instalments on the first day of April, July,
Octorber and January in arrears.
How much should be charged to the statement of profit or loss for the year
ended 30 September 20X6, and how much should be accured on the
statement of financial position?
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QUESTION BANK: Q16
A business sublets part of its office accommodation.
The rent is received quarterly in advance on 1 January, 1 April, 1 July and 1
October. The annual rent has been £24,000 for some years, but it was
increased to £30,000 from 1 July 20X5.
What amounts for this rent should appear in the company’s financial
statements for the year ended 31 January 20X6.
Statement of profit or loss Statement of financial position
A £27,500 £5,000 accrued income
B £27,000 £2,500 accrued income
C £27,000 £2,500 deferred income
D £27,500 £5,000 deferred income
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QUESTION BANK: Q17
The electricity account for the year ended 30 June 20X1 was as follows:
£
Opening balance for electricity accrued at 1 July 20X0 300
Payments made during the year
1 August 20X0 for three months to 31 July 20X0 600
1 November 20X0 for three months to 31 October 20X0 720
1 February 20X1 for three months to 31 January 20X1 900
30 June 20X1 for three months to 30 April 20X1 840
On 1 August 20X1 a payment of £840 was made for the three months ended
31 July 20X1. What is the charge for electricity that should be included in the
statement of profit or loss for the year ended 30 June 20X1?
A. £3,060
B. £3,320
C. £3,360
D. £3,620
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QUESTION BANK: Q21
Constains plc. has an insurance prepayment of £320 at 31 March 20X2.
During the year ended 31 March 20X2 Constains plc. paid two insurance
bills, one for £1,300 and one for £520.
What was the insurance prepayment at 31 March 20X1 if the charge for
insurance for the year was £1,760?
A. £200
B. £260
C. £320
D. £380
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QUESTION BANK: Q24
At 31 December 20X2 the following matters require inclusion in a company's
financial statements:
1 On 1 January 20X2 the company made a loan of £12,000 to an employer, repayable
on 30 April 20X3, charging interest at 2% per year. On the due date she repaid the
loan and paid the whole of the interest due on the loan to that date.
2 The company has paid insurance £9,000 in 20X2, covering the year ending 31
August 20X3.
3 In January 20X3 the company received rent from a tenant £4,000 covering the six
month to 31 December 20X2.
For these items. What total figures should be included in the company’s
statement of financial position at 31 December 20X2?
Current asset Current liabilities
A £22,000 £240
B £22,240 £0
C £10,240 £0
D £16,000 £6,000
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End of Chapter 9
Thank you!
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