Accruals and Prepayments

Question 1

What standard requires financial statements to be prepared using accrual accounting?

Answer 1

IAS 1

Question 2

Accrued Expenses/ Accruals Definition

Answer 2

• expenses which are charged against profit for particular period
• But have not been paid for yet
• shown in SoFP as liability
• expenses incurred in period but not yet recorded in Accounts
• made when expenses paid for in arrears

Question 3

What is the difference between accruals and Trade Payables?

Answer 3

• Accruals not yet been invoiced by suppliers/cover other expenses not from suppliers
• Trade payables- been invoiced by suppliers

Question 4

Prepaid Expenses/ Prepayments Definition

Answer 4

• payments been made in accounting period
• not relate to that period and so should not be charged against profit until later period
• shown in SoFP as Asset
• Expenses recorded in period but not incurred until next period
• arise when expenses paid for in advance

Question 5

What is the year end accounting adjustment for Accruals?

Answer 5

Dr Expense a/c (SoP/L) increase expense in current period
Cr Accruals (SoFP) increase Liability

Question 6

What is the year end accounting adjustment for Prepayments?

Answer 6

Dr Prepayments (SoFP) Increase Asset (owed a service generally)
Cr Expenses (SoP/L) would have been Dr when cash spent so needs to me removed

Question 7

Why do the brought forward accruals/prepayments need to be reversed at start of next financial year?

Answer 7

• accruals payment will now be recorded so don’t want to record twice, once paid not a liability
• prepayment no longer an asset as received service, can match expense against profit as now in next period

Question 8

What is the accounting adjustment to reverse the opening prepayment brought forward balance?

Answer 8

Dr Expense a/c (SoP/L) now expense can be matched to profit in correct period
Cr prepayments (SoFP) remove asset

Question 9

What is the accounting adjustment to reverse the opening accruals brought forward balance?

Answer 9

Dr Accruals (SoFP) remove liability
Cr Expense a/c (SoP/L) Will be Dr when cash payment made so don’t want to charge twice

Question 10

What are the four steps to follow on questions with Brought forward accruals/prepayments

Answer 10

1. reverse opening accrual/prepayments
2. post cash paid during year
3. post closing accrual/prepayment
4. balance off accounts

Question 11

What effect do Accruals have on profit/Net Assets?

Answer 11

• increases expenses
• reduces profit
• increases liabilities
• reduces net assets

Question 12

What effect do prepayments have on profit/net assets

Answer 12

• reduces expenses
• increases profit
• increases assets
• increases net assets

Question 13

Accrued Income

Answer 13

• when other income has been earned during accounting period
• not invoiced/received
• shown as asset in SoFP

Question 14

What is the accounting adjustment for accrued income?

Answer 14

Dr Current Asset/Accrued Income
(eg. rent in arrears, type of receivable) (SoFP) economic benefit is due

Cr Other Income a/c (SoP/L) increase income to what should be for that period

Question 15

Deferred Income

Answer 15

• when other income received in advance of being earned
• shown as liability in SoFP

Question 16

What is the accounting adjustment for Deferred Income?

Answer 16

Dr Other Income a/c
(SoP/L) decrease income as not to be included in that period

Cr Current Liability/ Deferred Income
(SoFP) (eg. rent in advance) increase in liability as owe a service to others

Question 17

How should Accrued/ Deferred Income brought forward balance be dealt with in next period?

Answer 17

• reversed the same as accruals/prepayments and the same 4 steps followed

Question 18

What effect does Accrued Income have on profit/net assets?

Answer 18

• increases income
• increases profit
• increases assets
• increases net assets

Question 19

What effect does Deferred Income have on profit/net assets?

Answer 19

• reduces income
• reduces profit
• increases liabilities
• reduces net assets