Accruals and Prepayments Flashcards

Flashcards covering the key topics in Chapter 10: Accruals and Prepayments.

Accruals

Expenses that have been incurred but not yet paid.

Prepayments

Payments that have been made in a year that actually relate to a following accounting year.

Key learning objective

Calculations and adjustments for accruals and prepayments, including scenarios where part of an invoice relates to one accounting period and part to another.

Which accounting standard requires accounts to be prepared on an accruals basis?

IAS 1

Accruals basis

Transactions and events should be recognized when they occur, not necessarily when cash changes hands.

Accrual

An expense which is charged against profit, even though it has not yet been paid for.

What type of entry is an obligation to pay a bill?

A liability.

What is an accrual and how does it differ from a trade payable?

A trade payable is an obligation to pay for goods or services that have been invoiced by our suppliers.

Prepayment

An expense that is paid in advance.

What is the journal entry to create an accrual?

Debit the expense and Credit accruals.

What is the journal entry to create a prepayment?

Debit prepayments and Credit the expense.

What is the journal entry for an electricity accrual?

Debit electricity and credit accruals.

What is the journal entry for a rent prepayment?

Debit prepayments and credit rent.

What is the four step approach for dealing with ongoing businesses and accruals/prepayments?

1. Reverse opening accruals or prepayments, 2. Post cash paid during the year, 3. Record closing accruals and prepayments, 4. Balance off accounts.

What is the journal entry to reverse an opening accrual?

Debit accruals and Credit electricity.

Why do we need to do a year end prepayment again?

To make sure that the rent for the year X8 is charged to the X8 statement of profit or loss.

Accrual journal entry

Debit expense and credit liability

Prepayment journal entry

Debit prepayments and credit rent

What is the journal entry to reverse an opening prepayment?

Remove the asset and charge that rent to the correct accounting period.

What happens when Fiona pays the bill in February?

Credit the electricity expense account with the 56 because that was charged in the previous period, and she doesn't have that liability anymore.

Accruals

Increase an expense has the effect of reducing profit. So increasing expense is debits to the expense, which reduces profit, increases liabilities and therefore reduces our net asset position.

Prepayment

Reduces expenses which leads to higher profit, so we're crediting our statement of profit or loss. As our effect on profit then, an increase in profit increases assets then, so increasing asset which leads to an increase in the net asset position of the business.

Accrued income and deferred income.

Other items of income that are in profit or loss and making sure that they have accruals and prepayments reflected in them as well.

Accrued income.

Shown as an asset in our statement of financial position.

Deferred income

This is shown as a liability in our stick financial position.

Accrued income.

What is owed to us.

Accounting adjustment made at year end.

Debit rent in arrears as a current asset and credit the rental income.

The impact of the adjustment made by Ben.

Debit rental income and credit rent in advance as a current liability.