Chapter 5 - Accruals & Prepayments Flashcards
What is the accruals basis of accounting?
To calculate the profit for the period, all the income and expenditure relating to the period must be included. Whether or not the cash has been received or paid/ or an invoice received/ not received.
What is the matching concept?
Income is matched with the expenditure incurred to generate that income in that accounting period.
When is it necessary to make an adjustment caused by the accruals concept?
When cash paid for expenses during the period DOES NOT EQUAL expenses relating to the period
What is an Accrual?
A ledger account used when we have incurred an expense but not yet paid for it at the year end.
What is the double entry used for an Accrual?
Dr Expense
Cr Accruals
What is a Prepayment?
A ledger account used when we have paid in advance for an expense that relates to next year.
What is the double entry used for a Prepayment?
Dr Prepayments
Cr Expense
How do you deal with a year-end accrual for the next year?
- The year end accrual becomes the opening balance (b/f), on the credit side, for the next period
- Reverse out the opening accrual: Dr Accruals, Cr Expenses
- Record any cash paid during the year in the expense ledger: Dr Expense, Cr Cash
- Record any accruals if need be: Dr Expenses, Cr Accruals
- Close off the expense ledger and take the balance to the SPL
- Close off the accruals ledger and take the balance to the current liabilities in the SFP
Shortcut: MINUS opening accrual ADD cash ADD closing accrual
How do you deal with a year-end prepayment for the next year?
- The year end prepayment becomes the opening balance (b/f), on the debit side, for the next period
- Reverse out the opening prepayment: Dr Expenses, Cr Prepayments
- Record any cash paid during the year in the expense ledger: Dr Expense, Cr Cash
- Record any prepayments if need be: Dr Prepayments, Cr Expenses
- Close off the expense ledger and take the balance to the SPL
- Close off the prepayments ledger and take the balance to the current assets in the SFP
Shortcut: ADD opening prepayment ADD cash MINUS closing prepayments
What is deferred income?
Income received in advance that relates to the next period
Context: If a customer prepays, the business has deferred income
What is accrued income?
Income earned during the period but not yet received
Context: If a customer accrues expenses, the business has accrued income
What is the double entry used for deferred income?
Dr Income
Cr Deferred income (deferred income is a liability as it needs to be removed from SPL)
What is the double entry used for accrued income?
Dr Accrued Income (accrued income is an asset as it needs to be included in SPL)
Cr Income
How do you deal with a year-end deferred income?
- The year end deferred income becomes the opening balance (b/f), on the credit side, for the next period
- Reverse out the opening deferred income: Dr Deferred Income, Cr Income
- Record any cash paid during the year in the expense ledger: Dr Cash, Cr Income
- Record any accrued income if need be: Dr Income, Cr Deferred Income
- Close off the income ledger and take the balance to the SPL
- Close off the deferred income ledger and take the balance to the current liabilities in the SFP
How do you deal with a year-end accrued income?
- The year end accrued income becomes the opening balance (b/f), on the debit side, for the next period
- Reverse out the opening accrued income: Dr Income, Cr Accrued Income
- Record any cash paid during the year in the expense ledger: Dr Cash, Cr Income
- Record any accrued income if need be: Dr Accrued Income, Cr Income
- Close off the income ledger and take the balance to the SPL
- Close off the accrued income ledger and take the balance to the current liabilities in the SFP