Lecture 6: Accounting for Accruals, Prepayments and Other Adjustments. Flashcards
(13 cards)
In arrears (meaning):
At the end of the period to which the payment relates to.
Accruals and Prepayments:
Accruals:
- Also referred to as accrued expenses.
- Are expenses which are charged against the profit for a particular period even though they have not been paid for.
Prepayments:
- Expenses which have been paid for in one period but are not charged until a later period.
How do we account for Accruals?
Increase expenses - statement of profit or loss.
Increase current liabilities (accruals) - statement of financial position.
How do we account for prepayments?
Decrease expenses - statement of profit or loss.
Increase current assets (prepayments) - statement of financial position.
for example, car insurance.
What is the definition of deferred income?
Cash may be received in one period when the actual sale it relates to occurs in subsequent periods.
Example - Deposit
Definition of accrued income:
Cash received in one period in relation to an event which arose in a previous period.
Example - Bank interest income earned.
How do we account for deferred income: “unearned”
Decrease income (revenue/investment income) - SOPOL
Increase current liabilities (deferred income)- SOFP.
What is the original entry on the receipt of cash:
Increase income - SOPOL
Increase current assets - SOFP
This entry is to apply the matching process at the period end and remove “unearned” income.
How do we account for accrued income:
Increase income (revenue) - SOPOL
Increase current assets (accrued income) - SOFP
A sale made on credit, for which the invoice has been raised and issued to the customer, but hasn’t yet been recorded in accounts:
a) Increases income - SOPOL
b) Increase current assets (TR) - SOFP
A purchase made on credit for which the invoice has been received from the supplier but has not yet been recorded in the accounts:
a) Increase expenses - SOPOL
b) Increase current liabilities (TP) - SOFP
A receipt of cash from a customer in respect of a credit sale:
a) Increase CA (cash) - SOFP
b) Decrease current assets (TR) - SOFP
A payment of cash to a supplier in respect of a credit purchase:
a) Decreases current assets (cash) - SOFP
b) Decrease in current liabilities (TP) SOFP.
