Accounting for Accruals, Prepayments and Other Adjustments

Question 1

accruals concept

Answer 1

• also referred to as the ‘matching concept’
• match income with associated expenditure
• account for transactions in the period in which they are incurred, not when the cash is received or paid
• accruals are expenses which are charged against the profit for a particular period even though they have not yet been paid

Question 2

prepayments…

Answer 2

expenses which have ben paid for in one period but are not charged against profit until a later period because they relate to that later period

Question 3

we move expenses into the correct accounting period with accruals and prepayments if:

Answer 3

• if we pay for goods/services in the current period that relate to the next period we use a prepayment to transfer that expense forward into the next period
• if we have incurred an expense in the current period that won’t be paid for until the next period we use an accrual to bring the expense back into the current period

Question 4

how to account for accruals?

Answer 4

it will:
- increase expenses (cost of sales/administrative expenses/distribution costs) –> statement of profit or loss

• increase current liabilities (accruals) –> statement of financial position

Question 5

how do we account for prepayments?

Answer 5

it will:
- decrease expenses (cost of sales/administrative expenses/distribution costs) –> statement of profit or loss

• increase current assets (prepayments) –> statement of financial position

Question 6

deferred income:

Answer 6

• cash may be received in one period even though the actual sale to which it relates happens in the subsequent period
  -e.g. a deposit or an advance payment on an item which will be delivered in the future, we haven’t yet made the sale
• decreases income (revenue/investment income) –> statement of profit or loss
• increases current liabilities (deferred income) –> statement of financial position

Question 7

accrued income:

Answer 7

• cash may be received in one period in relation to an event which arose in a previous period
• e.g. bank interest income earned which wasn’t received until after the year-end date or where a business makes a sale but doesn’t invoice the customer until after the year end date
• increases income (revenue / investment income) –> statement of profit or loss
• increases current assets (accrued income) –> statement of financial position

Question 8

other adjustments - the posting of invoices - sale on credit, not yet recorded in the accounts

Answer 8

• a sale made on credit, for which the invoice has been raised and issued to the customer, but hasn’t yet been recorded in the accounts:
• increase income (revenue) –> statement of profit or loss
• increase current assets ( trade receivables) –> statement of financial position

Question 9

other adjustments - the posting of invoices - purchase on credit, invoice received, not yet recorded in accounts

Answer 9

• a purchase made on credit, for which the invoice has been received from the supplier, but hasn’t yet been recorded in the accounts:
• increase expenses (cost of sales/administrative expenses/ distribution costs) –> statement of profit or loss
• increase current liabilities (trade payables) –> statement of financial position

Question 10

other adjustments - the receipt of cash - cash from customer

Answer 10

• a receipt of cash from a customer in respect of a credit sale:
• an increase in current assets (cash and cash equivalents) –> statement of financial position
• increase current assets (trade receivables) –> statement of financial position

Question 11

other adjustments - the receipt of cash - cash to supplier

Answer 11

• a payment of cash to a supplier in respect of a credit purchase:
• decrease current assets (cash and cash equivalents) –> statement of financial position
• decrease current liabilities (trade payables) –> statement of financial position