Chapter 8 Flashcards

1
Q

In regards to accruals and prepayments what is the fundamental principle when it comes to accounts preparation?

A

That income and expenditure are recognised in the period in which they occur (are earned/consumed)
RATHER THAN
the period in which cash is received or paid (the accruals or matching concept)

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2
Q

What are the consequences of the fundamental principle?

A
  • Simply recording transactions in the ledgers when they arise may not necessarily reflect the true use of resources or assets for a particular period.

We use accruals and prepayments adjustments to match the income or expense for a period to the actual use of resources and assets

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3
Q

Define accrual

A

Accruals are expenses incurred by the business, using up resources, before the year-end, but are paid for after the year end

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4
Q

How are accruals show in financial statements?

A

Accrual is a liability in the statement of financial position

this reflects the obligation to pay for the service already used

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5
Q

How are accruals shown in double entry?

A

Dr Expense
Cr Accruals

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6
Q

What is a prepayment?

A

Prepayments occur when a business pays an invoice for an expense that relates wholly or partly to the following period

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7
Q

What are examples of prepayments

A

Business Rates
Rent
Insurance
Advertising (e.g. cost of next years campaign

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8
Q

How do you calculate amounts to be charged to the statement of profit or loss? (high level)

A

T accounts

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9
Q

What are the steps of calculating accruals and prepayments?

A

1) Post the reverse of the b/f prepayment or accrual to the expense account
2) post the invoices received into the expense account
3) calculate the correct y/e prepayment or accrual and post the double entry
4) The correct expense for the period should then be the balancing figure in the expense

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10
Q

How is accrued and deffered income treated?

A

Exactly same principles apply

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11
Q

T account: ‘To accrue expenses at period end’

A

Dr Expense
Cr Accruals (liability)

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12
Q

T account: ‘ To set up a prepayment at period end’

A

DR Prepayment (asset)
Cr Expense

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13
Q

T account: ‘To record income received in advance at period end

A

Dr Income
Cr Deferred income (liability)

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14
Q

T account: ‘ to record income due but not yet received at period end’

A

Dr Accrued income (asset)
Cr Income

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15
Q

Where does an accrual sit

A

it is a liability in the SFP

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16
Q

What is the difference between an accrual and a prepayment?

A

accruals relate to expenses or revenues that have occurred but not yet been recorded,

while prepayments refer to payments made in advance for future benefits

17
Q

Example of an accrual

A

Gas - bill in feb and may
statement in march - extract from second bill

18
Q

T accounts for a gas example of an accrual: first period

A

Gas Expense T account
D Invoice received
Accrued gas expense
C
To SPL

Accrual (payables)
D
balance c/f

C Accrued gas expense

19
Q

T accounts for a gas example of an accrual: next period

A

Gas Expense
D Invoice
C
Reversal of opening accrual
To statement of PL

Accrual (payables)
D reversal of opening accrual
C
balance b/f

20
Q

In terms of DEADCLIC what is an accrual?

A

a LIABILITY a PAYABLE in the SFP

21
Q

In terms of DEADCLIC what is a pre-payment?

A

An asset in the SFP (current asset)
reflecting the amount already paid for the service not yet used

22
Q

What is the example of a prepayment

A

Paying rent from jan-may on 1st Jan 1000
statement on 31st March
until 31st March £600
after £400

23
Q

Prepayment example: rent: t-account

A

Rent Expense
D
Invoice
C
Prepaid rent (£400) for next section
St of P/L (£600)

Prepayment (current asset)
D
Prepaid rent 400
C
Balance c/f
400

24
Q

What is accrued and deferred income?

A

Similar to accruals and prepayments,

but a business may receive rental income or receive interest on cash deposits

SAME principles apply

25
Q

Deferred income E.g Rent paid to business every three months, statment midway

A

Debit vash
Credit income

Rental income (SPL)
D
Deffered rental income 10
Statement of profit or loss 50

C
Rent received 30
Rent received 30

Deferred income (SFP)
D
blank
C
Deferred rental income
-liability

26
Q

What is an example of deferred income

A

Pay at beginning - paid too much for timeframeE.g Rent paid to business every three months, statment midway

27
Q

What is an example of accrued income

A

Pay at the end - not paid yet for timeframe
Receive income in arrears

28
Q

How to treat accrued income

A

recognise an asset in the SFP - accrued income

29
Q

What account does the accrual/deferred income go into?

A

SUNDRY payables
c(credited to accruals which forms part of sundry payables).