Chapter 8

Question 1

Accrual

Answer 1

Expenses incurred by the business by the year end which are paid for after the year end e.g. electricity

Liability in the SoFP

Question 2

Accrual double entry

Answer 2

Dr - expense - P/L
Cr - accruals - SoFP

Question 3

Prepayments

Answer 3

A business pays an invoice for an expense in advance for the following period e.g. rent, insurance

It is an asset in the SoFP

Question 4

Prepayments double entry

Answer 4

Dr - prepayments- SoFP
Cr - expense - P/L

Question 5

Reversing accruals for subsequent years

Answer 5

Step 1 - reverse last years accrual
Dr - accruals (balance b/f)
Cr - expense

Step 2 - post cash paid this year
Dr - expense
Cr - cash

Step 3 - post any closing accrual or prepayment
Dr - expense
Cr - accrual

Question 6

Subsequent years - reversing prepayments

Answer 6

Step 1 - reverse the double entry
Dr - expense
Cr - prepayment (balance b/f)

Step 2 - post any cash paid this year
Dr - expense
Cr - cash

Step 3 - post any closing accruals or prepayments
Dr - prepayment
Cr - expense

Question 7

Accrued income

Answer 7

A business earns income that will not be received until the following period e.g. lanlord in rental process

Asset in the SoFP

Question 8

Accrued income double entry

Answer 8

Dr - accrued income (SoFP)
Cr - income (P/L)

Question 9

Deferred income

Answer 9

A business receives income that will not be earned until the following accounting period

A liability in the SoFP

Question 10

Deferred income double entry

Answer 10

Dr - income (P/L)
Cr - deferred income (SoFP)