CHAPTER 10 - ACCRUALS AND PREPAYMENTS

Question 1

What is an accrual and how is it applied?

Answer 1

An expense incurred in the current year but which is unpaid at financial year end

eg. gas, electric, phone, wages

The acrual is added to the Trial Balance figure for that expense at year end

And charged to the P&L in the year it was incurred

Question 2

What is a prepayment and how is it applied?

Answer 2

A payment for something that hasn’t yet been incurred at financial year end

The payment is deducted from the Trial Balance total for that expense at financial year end

And charged to the following year’s P&L

Question 3

How are accruals and prepayments shown in the P&L?

Answer 3

Either as a separate line under each relevant expense with the net expense value totalled

Wages 36500

Add Accrual 3000 39500

Or against the expense name in brackets with the original value

Wages (36500+3000) 39500

Question 4

How are acrruals and prepayments shown in the Balance Sheet?

Answer 4

Accruals are Current Liabilities (it’s still owed at year end) - shown after Creditors on BS

Prepayments are Current Assets (owed to us at year end) - shown after Debtors on BS