Accruals and prepayments Flashcards
What is the accruals or matching concept?
It is a fundamental principle of accounts preparation that income and expenditure are recognised in the period they are earned or consumed rather than in the period in which they are paid for.
Define accruals
Expenses incurred by a business, using up resources, by the year-end, which are paid for after the year-end.
What are some examples of accruals?
Electricity, Telephone, Staff bonuses
How would an accrual appear in financial statements?
It would appear as a liability in the statement of financial position, reflecting the obligation to pay for the service already used.
The double entry would be
Dr Expense
Cr Accruals
What is a prepayment?
When a business pays an invoice for an expense that relates wholly or partly to the following period e.g., rent and insurance.
How would a prepayment appear in financial statements?
It would appear as an asset in the statement of financial position, reflecting the amount paid for the service not yet used.
The double entry is
Dr Prepayments
Cr Expense
In subsequent years of trading, a business will have an opening balance in its ledger accounts for what?
Accruals and prepayments
What is the three step process, following double entry, which helps calculate the correct expense in subsequent years?
1) Reverse out last year’s accrual (we do the opposite double entry for the original accrual)
2) Post any cash paid last year
3) Post any closing accrual or prepayments
What is accrued income?
When a business earns income that will not be received until the following period.
What is accrued income in the SoFP
Asset
Double entry is: Dr Accrued Income
Cr Income (SPL)
What is deferred income?
When a business receives income that will not be earned until the following period.
How does deferred income appear in the SoFP?
As a liability
Double entry is: Dr Income (SPL)
Cr Deferred income
