9 - Accruals and prepayments Flashcards
What are accruals and prepayments?
Accruals:
A liability for expenses to be charged against a particular period even though they haven’t been paid for.
Dr expense and Cr accruals
Prepayments:
An asset relating to expenses that have been paid in one period but are not charged to the profit or loss until a later period to which they relate.
Dr Prepayments and Cr expense
What do we do to ensure the expenses are correctly matched to the appropriate reporting period? (I prefer just calculating it. Slapping into T accounts bare long)
Reverse opening accruals and prepayments
Post cash payments to the relevant expense ledger
Calculate and post closing accruals and prepayments
Reversing accruals and prepayments
Reverse opening accrual:
Dr Accruals and Cr expense
Post closing accrual:
Dr expense and Cr accruals
Reverse opening prepayment:
Dr expense and Cr prepayments
Post closing prepayment:
Dr Prepayments
Cr Expense
What is accrued income and deferred income?
Accrued income: (Asset)
Receipt of income in arrears at the year end and (income is outstanding). For example couple moths worth of rent owed to us because they haven’t paid.
Dr Accrued income
Cr Revenue
Deferred income: (Liability)
Income has been received in advance of delivering the goods or services
Dr Revenue
Cr Deferred income
How to know whether to use 123 step approach or use timeline?
If question mentions brought forward accrued/deferred income use 123. Otherwise use timeline and logic.
What is the 123 steps for accrued/deferred income?
Reverse the opening accrued/deferred income
Post cash received in the normal way (Dr cash and Cr income)
Calculate and post the closing accrued or deferred income
