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?
An expense incurred by the business before the period end, but which is paid for after the period end (liability in the SFP)
What is a prepayment?
When a business pays an invoice for an expense that relates wholly or partly to the following period (asset in the SFP)
What is the double entry for a prepayment of £100?
Dr Prepayments £100
Cr Expense Account £100
What is 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
