6. Accruels and prepayments

Question 1

The accruels basis can apply in four situations:

Answer 1

1. Expenses accrued
2. Expenses prepaid
3. Income accrued
4. Income prepaid (deferred income)

Question 2

Define accruals

Answer 2

A benefit received but not yet paid for

Question 3

Define prepayments

Answer 3

A benefit paid for but not yet received

Question 4

What is the journal entry for Accrued expense? (2)

Answer 4

• Dr Expense

- Cr Accruels

Question 5

What is the journal entry for prepaid expenses? (2)

Answer 5

• Dr Prepayments

- Cr Expense

Question 6

Timings: When should adjustments for accruels and prepayments be made?

Answer 6

After extracting the trial balance

Question 7

Accrued income is a _____ in a balance sheet

Asset or liability?

Answer 7

Asset

For example, if we have delivered the goods but the customer has not yet paid for them or received an invoice, we still have to account for the earned income however we cannot put it in sales. Therefore we need to recognise another form of receivable. This will be invoiced and collected at some point in the future; accrued income.

Question 8

Deferred income is a _____ in a balance sheet

Asset or liability?

Answer 8

Liability

If we haven’t delivered the goods yet then we haven’t ‘earned’ the income so we cannot recognise anything in the sales account yet. Instead we recognise a liability called deferred income. It may seem strange that we are recognising a liability when we are dealing with a customer but if they pay in advance for goods then we owe them that money until we deliver the goods. If we fail to do so we will have to repay them the amount that they have paid.

Question 9

What is the double entry for Accrued income?

Answer 9

Dr accrued income account

Cr sales

Question 10

What is the double entry for deferred income?

Answer 10

Dr sales/ income

Cr deferred income account