10 - Accruals and prepayments Flashcards
what are accrued expenses and their accounting entry
expenses that are incurred by the business during the accounting period but unpaid at the end of the period
entry for accrued expenses:
DEBIT = (relevant) expense (SPL)
CREDIT = accruals (SOFP)
what are prepaid expenses and their accounting entry
when expenses are paid for before the item purchased has been used
entry for prepaid expenses:
DEBIT = prepayments (SOFP)
CREDIT = (relevant) expense (SPL)
why must accrued expenses and prepayments be reversed
having recorded accruals and prepayments in the accounts at the period end, bookkeeper must reverse them out of the nominal ledger the following year
(similar to how income/expenses are transferred from nominal ledger to spl at end of each fy. and assets/liabilities/capital remain in nominal ledger and carried forward to next fy)
what is the entry to reverse accruals and prepayments
accrued:
DEBIT = accruals (SOFP)
CREDIT = (relevant) expense (SPL)
prepayments:
DEBIT = (relevant) expense (SPL)
CREDIT = prepayments (SOFP)
what is the dual effect of reversing accruals and prepayments
dual effect of ensuring that:
- expenses and income are accurate
- accruals and prepayments are correct
what is accrued income
accrued income occurs when income hasn’t been earned during the accounting period and therefore is due to the business but hasn’t been invoiced or received by the period end
what is entry to accrued income
DEBIT = accrued income (SOFP)
CREDIT = (relevant) income (SPL)
in SOFP, accrued income is shown under current assets
what is prepaid income and how does it arise
arises when income is received in advance of it being earned, ‘deferred income’
entry to prepaid income?
DEBIT = (relevant) income (SPL)
CREDIT = prepaid income (SOFP)
in sofp, prepaid income is under current liabilities
