8. ACCRUALS AND PREPAYMENTS Flashcards
What is the accruals or matching concept?
Income and expenditure should be recognized in the period in which they occur rather than the period in which cash is paid or received
What is an accrual?
(is it an asset or liability?)
Expenses brought into the financial statement for goods and services received but not
yet paid for by the purchasing business, e.g. bill for electricity after use.
It is a current (short term) liability
What is a prepayment?
(is it an asset or liability?)
Goods or services paid for but yet to be received, e.g. rent paid in advance.
It is a current (short term) asset
What is the double entry for a prepayment of £100?
Dr Prepayments £100
Cr Expense Account £100
What is prepaid income (aka deferred income) and how is it treated?
Income received in advance, treated the same as prepayments
What is the double entry to accrue for an expense (not yet paid) at period end?
Dr Expense (P&L)
Cr Accruals (liability on SFP)
What is the double entry to set up a prepayment at period end?
Dr Prepayments (Asset on SFP)
Cr Expense (P&L)
What is the double entry to record income received in advance (deferred income) at period end?
Dr Income (P&L)
Cr Deferred Income (Liability on SFP)
What is the double entry to record income due but not yet received at period end?
Dr Accrued income (asset on SFP)
Cr Income (P&L)
What is the first step when tackling any accruals question?
Reverse the accrual from the prior period
Which of the following is true?
a. accruals are liabilities
b. accruals are income
c. accruals are assets
d. accruals are expenses
a. accruals are liabilities
(because it is money that a business owes)
