Chapter 6 - Accruals & Prepayments

Question 1

What are accruals

Answer 1

Expenses which have been incurred by a business during an accounting period but at the period end no invoice has been received so they haven’t been paid

Question 2

What is a prepayment

Answer 2

A prepayment arises when we have paid for an item of expense before we have used it

Question 3

What is the double entry for accruals

Answer 3

Debit expense - we have used goods or services but not paid for them so our expenses are initially understated

Credit accrual - credit the accruals account because we have not yet paid for the expense this has the affect of showing a liability on the financial position

Question 4

What are the steps for accountability for accruals

Answer 4

1. Reversal
2. Bank
3. Adjustment
4. Balance

Question 5

What is the double entry for prepayment

Answer 5

Debit prepayment - as we have not used the goods or services this is now an asset of the business as we are owed the service we have paid for
Credit expense - we need to reduce the total expense part of the cash paid relates to next year’s expense but is currently included in this year.

Question 6

How to reverse an accrual

Answer 6

Debit accrual
Credit expense

Question 7

How to reverse a prepayment

Answer 7

Debit expense
Credit prepayment

Question 8

What is the 3 step process for reversing a prepayment or accrual

Answer 8

1 - reverse out last years accrual or prepayment
2- post any cash paid this year
3 - post any closing accrual or prepayment

Question 9

What is prepaid income (deferred income)

Answer 9

Prepaid income is in accrual accounting, money received for good or services which have not yet been delivered

Question 10

Is prepaid income an asset or liability on the statement of financial position

Answer 10

Liability

Question 11

What is the adjustment for prepaid income

Answer 11

Debit sales - profit and loss to reduce revenue for the period

Credit prepaid income - statement of financial position liability created for the service which is owed

Question 12

What is accrued income

Answer 12

Accrued income is income earned but not yet received this will be an asset at the end of a period as the work has been done but income not received

Question 13

What is the double entry for accrued income

Answer 13

Debit accrued income (statement of financial position to recognise the asset for the income earned but not received)

Credit sales (profit and loss to increase the sales)

Question 14

what is commissions income

Answer 14

accrued income and is a current asset

Question 15

what is prepaid income and what is the double entry

Answer 15

reduces income in the current period. reduces profit in current period.

Debit income
Credit liability

Question 16

what is accrued income and what is the double entry

Answer 16

increases income in current period. Increases profit in current period.

Debit Asset
Credit Income

Question 17

what is prepaid expenses and what is the double entry

Answer 17

Reduces expenses in current period. Increases profit in current period.

Debit Asset
Credit Expense

Question 18

What is accrued expense and what is the double entry

Answer 18

Increases expenses in current period. Reduces profit in current period.

Debit expense
Credit Liability

Question 19

What is accounting manipulation

Answer 19

Period end adjustments, accruals and prepayments, can manipulate financial statements. They cause an entry in the P&L account so by making incorrect entries we affect profit of a business.

Question 20

what are the ways to increase profit through accounting manipulation

Answer 20

Not making entries for accruals that are required therefore not recording legitimate expenses from the P&L.

Overstating prepayments therefore removing too much expense from the P&L

not prepaying income to a future period therefore overstating income in the P&L