Chapter 6: Accruals and Prepayments

Question 1

What are accrued expenses (accruals) and how are they show in the statement of financial position?

Answer 1

are expenses which related to an accounting period but have not been paid. They are shown as a current liability.

Question 2

What are prepaid expenses (prepayments) and how are they shown in the statement of financial position?

Answer 2

are expenses which have already been paid but late to a future accounting period. They are shown as a current asset

Question 3

What is the accruals or matching concept?

Answer 3

that expenses are matched to the period to which they relate rather than the period in which the expenses were paid.

Question 4

How do we correct for a payment made in this period that relates to a future period?

Answer 4

by using a prepayment to transfer that charge to the following period.

Question 5

How do we correct for an expense made in this period that will only be settled in the next period?

Answer 5

by using an accrual to charge back into this period.

Question 6

What is the double entry for prepayments?

Answer 6

Prepayments are included in receivables in current assets in the statement of financial position. They are asset as the present money that pas been paid out in advance of the expense being incurred.

Question 7

What is the double entry for accruals?

Answer 7

Accruals are included in payables in current liabilities as they represent liabilities which have been incurred but for which no invoice has yet been received.

Question 8

What are two things to remember in relation to accruals/prepayments when preparing the financials?

Answer 8

1. include all expenses that relate to the period and exclude those that don’t (accruals concept)
2. make sure the financials include all the assets and liabilities of the business.

Question 9

What needs to happen in the period following the one in which an accrual or prepayment is created?

Answer 9

it needs to be reversed so that the organisation doesn’t charge twice for the same expense (accrual) or will never charge itself (prepayment)

Question 10

Accruals…income/expenses…profit…assets/liabilities

Answer 10

increase expenses, reduce profit, increase liabilities

Question 11

Prepayments…income/expenses…profit…assets/liabilites

Answer 11

Reduce expenses, increase profit, increase assets

Question 12

Prepayments of income…income/expenses….profit….assets/liabilities

Answer 12

Reduces income, reduces profit, increases liabilities