03 01 06 Prepayments and Accruals Flashcards
what are accrued expenses?
Expenses incurred by a business in the current accounting period but not yet invoices or paid for i.e. a future cash payment will need to be made by the business
What are the two steps needed to account for accrued expenses?
a) increasing the relevant expense account in the SPL
b) recording a current liability called “accrued expenses” in the SOFP for amount owing at the year end
What is the journal need to account for accrued expenses?
Expense Account (SPL) - Debit (+expense) Accrual Income (SOFP) - Credit (+liability)
Why would a company need to reverse an accrued expense?
When the remainder of the invoice is paid in the next accounting period the accrued expense journal need to be reversed to reflect this
What two steps are needed to account for the reversal of an accrued expense?
a) record the remainder of the invoice as an expense (D - Expense/C - Bank)
b) remove the leftover invoice amount from accrued expenses (D - Accrued Expense/ C - Expense)
What is a prepaid expense?
An expense that is paid in the current accounting period but relates to the following accounting period i.e. expenses in advance
What are the two steps needed to account for prepaid expenses?
a) decrease the relevant expense account in SPL
b) record a current asset called “prepaid expenses” in SOFP
What is the journal need to post prepaid expense to the general ledger?
Prepaid Expenses SOFP (D - +Asset)
Expense Account SPL (C - reversal of original expense)
What are the journals need to account for the reversal of prepaid expenses?
Expense Account SPL - (D - expense applied to current year)
Prepaid expenses SOFP (C - reversal of prepaid expense)
What is accrued income?
Income that is earned during an accounting period but has not yet been invoiced or received i.e. income that still needs to be paid by the customer
What are the two steps needed to account for accrued income?
a) increase the relevant income account (SPL)
b) records a current asset called “accrued income” in SOFP as the business is owed income
What journal is needed to record accrued income?
Accrued Income (D - +asset) Income Account (C - +income)
What is the journal needed to reveres accrued income?
Income Account (D - reversal of income) Accrued Income (C - reversal of accrued income)
What is prepaid income?
income that has been paid in the current accounting period but related to the next accounting period i.e. income in advance
What are the two ways you would account for prepaid income?
a) decreasing relevant income account in SPL
b) recording a current liability called “prepaid income” as business has not yet earned the income and so owes it back
