Accruals, Prepayments, and Income Adjustments

Vocabulary-style flashcards covering the definitions, accounting treatments, journal entries, and financial impacts of accruals, prepayments, accrued income, and deferred income.

Accruals concept (Matching concept)

A principle stating that income and expenses recorded in the Statement of Profit or Loss (SPL) must be matched to the period to which they relate, regardless of whether cash is paid or not.

Accrual (Accrued expense)

An expense that has been incurred because the service was provided during the period, but the cash remains unpaid by the end of the period; it is recorded as a liability.

Prepayment (Pre-paid expense)

An expense that has been paid in advance but not yet incurred because the service has not yet been provided by the end of the period; it is recorded as an asset.

Deferred income (Pre-paid income)

Income or cash received in advance for goods or services that have not yet been delivered by the end of a period; it is recorded as a current liability.

Accrued income

Income that has been earned because the service was provided during the period, but the cash has not yet been received by the end of the period; it is recorded as a current asset.

Journal entry for an Accrual

A transaction recorded as: Dr Expense ($\uparrow$) and Cr Accrual (liability).

Journal entry for a Prepayment

A transaction recorded as: Dr Prepayment (asset) and Cr Expense ($\downarrow$).

Journal entry for Deferred Income

A transaction recorded as: Dr Income and Cr Deferred Income (liability).

Journal entry for Accrued Income

A transaction recorded as: Dr Accrued Income (asset) and Cr Income.

SFP Treatment for Prepayments and Accrued Income

These are recorded in the Statement of Financial Position (SFP) under current assets (CA) because they represent future economic benefits.

SFP Treatment for Accruals and Deferred Income

These are recorded in the Statement of Financial Position (SFP) under current liabilities (CL) because they represent an obligation to make a payment or provide a service.

PAPA ALLA

A mnemonic formula used to calculate the Statement of Profit or Loss (SPL) expense: SPL expense = Actual Amount paid + (Closing Accrual + Opening Prepayment) - (Opening Accrual + Closing Prepayment).

Effect of Assets on Profit

Adjustments for closing current assets, such as prepayments and accrued income, increase the net profit.

Effect of Liabilities on Profit

Adjustments for closing current liabilities, such as accruals and deferred income, decrease the net profit.

Net Asset Position Calculation

Calculated using the formula: $\text{Net Assets} = \text{Assets} - \text{Liabilities}$. Accruals and deferred income decrease net assets, while prepayments and accrued income increase them.