accruals and prepayments
DESCRIPTION
Accruals and prepayments. hink Corner. uiz Corner. What’s Inside ?. Learning Objectives. Prepaid expenses. Accruals and prepayments. Learning Objectives. After reading this chapter, you will be able to:. . Briefly explain what accrual accounting is. . - PowerPoint PPT PresentationTRANSCRIPT
Accruals Accruals and and prepaymeprepaymentsnts
What’s Inside ?
Learning ObjectivesLearning Objectives
hink Corner
uiz Corner
Accruals and prepayments
Prepaid expenses
Learning ObjectivesLearning Objectives
Briefly explain what accrual accounting is. Explain the term ‘accrued expenses’ and adjust expenses accounts for accruals.
Explain the term ‘prepaid expenses’ and adjust expenses accounts for prepayments.
Explain the term ‘revenues in arrears’ and adjust revenues accounts for amounts in arrears. Explain the term ‘revenues in advance’ and adjust revenues accounts for amounts in advance. Disclose accruals, prepayments, revenues in arrears and revenues in advance in a balance sheet. Become familiarised with the alternative method of recording.
After reading this chapter, you will be able to:
Accrual accountingAccrual accounting is based on the ____________.
Accrual concept states that:
Revenues are recognised in the profit and loss account for the period in which they have been earned, not when they are received.
Expenses are recognised in the profit and loss account for the period in which they have been incurred, not when they are paid.
Therefore, when we draw up the profit and loss account at the year end, we need to make adjustments to _______ and _______ for any _______ and __________.
accrual concept
revenues expensesaccruals prepayment
s Learning Objectives
Accrued expensesAccrued expense is the expense _______ in a period but which has not yet been _______ by the end of that period.
Example 1: Longway Company paid electricity charges every three months. The following are the dates of payments:
Expenses due Expenses paid Amount
$
31 March 20X7 3 April 20X7 1,500
30 June 20X7 5 July 20X7 1,800
30 September 20X7 2 October 20X7 2,000
31 December 20X7 4 January 20X8 1,600
incurredpaid for
Accrued expenses
However, at the year end, the electricity charges for the last three months were still outstanding.
The total electricity charges for the year 20X7 should be ($1,500 + $1,800 + $2,000 + $1,600) = $6,900. And this is the amount needed to be transferred to the __________________ at the year end.
Electricity
20X7 $Apr 3 Bank 1,500Jul 5 Bank 1,800Oct 2 Bank 2,000
profit and loss account
This outstanding amount is called _____________ or ______ and is to be carried forward to the following year as a ______.
Accrued expenses
Dec 31 Accrued c/f 1,600
Electricity
20X7 $Apr 3 Bank 1,500Jul 5 Bank 1,800Oct 2 Bank 2,000
20X7 $Dec 31 Profit and loss 6,900
6,900 6,900
accrued expenseaccrual
liability
The balance to be carried forward to the next financial year.
The amount of electricity actually paid in the current year.
Learning Objectives
The amount of electricity incurred in the current year.
The amount of electricity incurred but not yet paid in the current year.
Prepaid expensesPrepaid expense is an expense which has been ____ in a period but will not be incurred until the _______ period.
Example 2: Longway Company paid insurance every three months. The following are the dates of payments:
Expenses due Expenses paid Amount$
31 March 20X7 28 March 20X7 5,00030 June 20X7 25 June 20X7 5,00030 September 20X7 27 September 20X7 5,00031 December 20X731 March 20X8
paid
following
29 December 20X7 10,000
Prepaid expenses
At the year end, the company had paid three months’ insurance in advance.
The total insurance for the year 20X7 should be ($5,000 x 4) = $20,000. And this is the amount needed to be transferred to the ____________ ______ at the year end.
Insurance
20X7 $Mar 28 Bank 5,000Jun 25 Bank 5,000Sep 27 Bank 5,000
profit and loss
Dec 29 Bank 10,000
account
The amount of insurance incurred in the current year.25,000 25,000
This excess amount is called _____________ or _________ and is to be carried forward to the following year as an _____.
Prepaid expenses
Dec 31 Profit and loss 20,000
prepaid expense
asset
The balance to be carried forward to the next financial year.
20X7 $
Insurance
Mar 28 Bank 5,000Jun 25 Bank 5,000Sep 27 Bank 5,000Dec 29 Bank 10,000
20X7 $
“ 31 Prepaid c/f 5,000
The amount of insurance paid but which has not been incurred in the current year.
uiz Corner
The amount of insurance actually paid in the current year.
hink Corner
prepayment
Stationery not entirely used up in the period in which it is bought should be treated as a prepayment.
hink Corner
nswer
The amount paid for stationery is usually treated as an expense. For the stock of unused stationery at the end of a period, what is the accounting treatment?
The balance of the stationery account should be carried forward to the following period as a debit balance.The stock of stationery is seldom added to the stock of unsold goods in the balance sheet; it is added to other prepayments.
Learning Objectives
Revenues in arrearsRevenue in arrears (_____________) is other revenue (other than sales) earned but which has not yet been _______ in the period.Example 3: Longway Company received a commission every three months. The following are the dates of receipts:
Revenues due Revenues received Amount$
31 March 20X7 4 April 20X7 10,00030 June 20X7 2 July 20X7 8,00030 September 20X7 5 October 20X7 12,00031 December 20X7 6 January 20X8 9,000
received
accrued revenue
Revenues in arrears
At the year end, the company had not yet received the commission for the 3 months to 31 December 20X7.
The total commission receivable for the year 20X7 should be ($10,000 + $8,000 + $12,000 + $9,000) = $39,000. And this is the amount needed to be transferred to the __________________ at the year end.
profit and loss account
Commission Receivable
20X7 $Apr 4 Bank 10,000Jul 2 Bank 8,000Oct 5 Bank 12,000
39,00039,000Dec 31 In arrears c/f 9,000Oct 5 Bank 12,000
Commission Receivable
20X7 $Apr 4 Bank 10,000Jul 2 Bank 8,000
20X7 $
This outstanding amount is called _____________ and is to be carried forward to the following year as an _____.
Revenues in arrearsaccrued revenue
asset
Dec 31 Profit and loss 39,000
The amount of commission earned in the current year. The amount of commission
actually received in the current year.The amount of commission earned but not yet received in the current year.
The balance to be carried forward to the next financial year.
Learning Objectives
Revenues in advanceRevenue in advance (_____________) is the other revenue which has been received in a period but will not be _____ until the following period.Example 4: Longway Company received rent every three months. The following are the dates of receipts:
Revenues due Revenues received Amount$
31 March 20X7 24 March 20X7 10,00030 June 20X7 27 June 20X7 10,00030 September 20X7 25 September 20X7 10,00031 December 20X731 March 20X8
earned
prepaid revenue
26 December 20X720,000
Revenues in advance
At the year end, the company has received the rent for the 3 months to 31 March 20X8 in advance.
The total rent receivable for the year 20X7 should be ($10,000 x 4) = $40,000. And this is the amount needed to be transferred to the __________________ at the year end.profit and loss account
Rent Receivable
20X7 $Mar 24 Bank 10,000Jun 27 Bank 10,000Sep 25 Bank 10,000Dec 26 Bank 20,000
50,000 50,000
20X7 $
Rent Receivable
Mar 24 Bank 10,000Jun 27 Bank 10,000Sep 25 Bank 10,000Dec 26 Bank 20,000
20X7 $
This amount received in advance is called _____________ and is to be carried forward to the following year as a ______.
Revenues in advance
prepaid revenue liability
Dec 31 Profit and loss 40,000
The amount of rent earned in the current year.The balance to be
carried forward to the next financial year.
“ 31 In advance c/f 10,000
The amount of rent actually received in the current year.
Learning Objectives
The amount of rent received but not yet earned in the current year.
Disclosure in the balance sheet
As we mentioned before, prepaid expenses and revenues in arrears are ______.
Prepaid expenses represent the resources to be _______ in the near future.
Revenues in arrears represent the monies to be _______ in the near future.
Therefore, both prepaid expenses and revenues in arrears should be shown under ____________ in the balance sheet.
assets
used up
received
current assets
Disclosure in the balance sheet
As we mentioned before, accrued expenses and revenues in advance are ________.
Accrued expenses represent the debts to be ______ in the near future.
Revenues in advance represent the obligations to ______ services in the near future.Therefore, both accrued expenses and revenues in advance should be shown under ______________ in the balance sheet.
liabilities
settled
provide
current liabilities
Disclosure in the balance sheet
Revenues in advance 10,000Accrued expenses 1,600Revenues in arrears 9,000
Prepaid expenses 5,000
Current Assets $ Current Liabilities $
Longway CompanyBalance Sheet as at 31 December 20X7 (extract)
Creditors XXXStock XXXDebtors XXX
Bank XXXCash XXX
Refer to Examples 1 – 4. They will be shown in Longway Company’s balance sheet as follows:
Learning Objectives
Alternative methodUsing this method, instead of carrying forward the accrued or prepaid balance in the expenses account, we now transfer the balance to an accruals account or a prepayments account.The double entry for recording an accrued expense is:
Dr Expenses accountCr Accruals account
The double entry for recording a prepaid expense is:Dr Prepayments accountCr Expenses account
Alternative methodRefer to Example 1. The double entries would be:
Dec 31 Accruals 1,600
Electricity
20X7 $Apr 3 Bank 1,500Jul 5 Bank 1,800Oct 2 Bank 2,000
20X7 $Dec 31 Profit and loss 6,900
6,900 6,900
Dec 31 Balance c/f 1,600
Accruals
20X7 $ 20X7 $Dec 31 Electricity 1,600
Alternative methodRefer to Example 2. The double entries would be:
Dec 31 Insurance 5,000
Prepayments
20X7 $ 20X7 $Dec 31 Balance c/f 5,000
Dec 31 Profit and loss 20,00020X7 $
Insurance
Mar 28 Bank 5,000Jun 25 Bank 5,000Sep 27 Bank 5,000Dec 29 Bank 10,000
20X7 $
“ 31 Prepayments 5,000
25,000 25,000
Likewise, a revenues in arrears account and a revenues in advance account are opened to record all accrued revenues and prepaid revenues, respectively.
Alternative method
The double entry for recording an accrued revenue is:
Dr Revenues in arrears accountCr Revenues account
The double entry for recording a prepaid revenue is:Dr Revenues accountCr Revenues in advance account
Alternative methodRefer to Example 3. The double entries would be:
Oct 5 Bank 12,000
Commission Receivable
20X7 $Apr 4 Bank 10,000Jul 2 Bank 8,000
20X7 $
Dec 31 Revenues in arrears 9,000
Dec 31 Profit and loss 39,000
39,000 39,000
Dec 31 Commission 9,000 receivable
Revenues In Arrears
20X7 $ 20X7 $Dec 31 Balance c/f 9,000
Alternative methodRefer to Example 4. The double entries would be:
Dec 31 Balance c/f 10,000
Revenues In Advance
20X7 $ 20X7 $Dec 31 Rent receivable 10,000
20X7 $
Rent Receivable
Mar 24 Bank 10,000Jun 27 Bank 10,000Sep 25 Bank 10,000Dec 26 Bank 20,000
20X7 $Dec 31 Profit and loss 40,000
50,000 50,000
“ 31 Revenues in advance 10,000