Chapter 6- Accruals And Prepayments

Question 1

What is the accrual basis of accounting

Answer 1

• show in the profit and loss scoping of the business the income and expenditure earned or incurred during a period and not necessarily that which is received or paid in cash

Question 2

What are expenses accrued?

Answer 2

• where expenses have been incurred but not paid by the end of an accounting period

Question 3

Describe the adjustments necessary for expenses accrued

Answer 3

• reduces profit earned as it increases relevant expense (recorded as debit in the P&L)
• increases accruals, which are liabilities

Question 4

What is the double entry for an accrued expense

Answer 4

• specific expense account is debited as expenses have increased
• accruals account is credited as liabilities have increased
• double entry has to be reversed out on 1jan

I.e accruals debited and expense account credited

Question 5

What are expenses prepaid?

Answer 5

• means that we have paid in this period for an expense which relates to the following period

E.g insurance and rates

Question 6

Describe the adjustments necessary for expenses prepaid

Answer 6

• increased profit earned by reducing the relevant expense in the P&L (credit)
• increased prepayments (debtors) which is recorded as an asset in b/s

Question 7

What is the double entry to record prepaid expenses?

Answer 7

• prepayments account debited (increase in assets)
• specific expense account credited as decrease in relevant expense
• double entry needs to be reversed at the start of following accounting period
• I.e specific expense accounts debited as expense paid and hence decreased and prepayments credited as this asset has now decreased

Question 8

What is income received in advanced

Answer 8

• also known as deferred income
• income received for a period beyond the end of the accounting period

E.g if tenant pays landlord rent in advance

Question 9

What is the double entry to record the income received in advance?

Answer 9

Income account debited
Deferred income account credited as you owe something

Question 10

What is income accrued?

Answer 10

Where income has been earned and not received
- e.g interest receivable

Question 11

What is the double entry to record the accrued income?

Answer 11

Accrued income account debited as treated as a debtor
Income account credited

• like prepayments this will be reversed out at the start of the next accounting period

Question 12

When are the adjustments for accruals and prepayments made?

Answer 12

• after extracting the trial balance