Accrued and Prepaid Expenses and Income

Undersanding Payables and Receivables

Other Payables & Other Receivables

• Key concepts: accrued expenses, prepaid expenses, accrued income, prepaid income

• Focus on recording payments and income at the end of the financial period.

Accrued & Prepaid Expenses

Definitions

• Accrued Expenses: Expenses incurred but not yet paid.

• Prepaid Expenses: Expenses paid in advance for benefits that will be received in future periods.

Recording Accrued & Prepaid Expenses

• Payments made during the financial period are recorded in the relevant expense accounts.

• At the end of the financial period:

  • Debit Expense Account: for amounts incurred.

  • Credit Cash or Bank Account: for amounts paid to suppliers.

Matching Principle

• Expenses should be recorded in the income statement for the period they are incurred.

• Calculate expense amounts spent in the period, based on invoice timing that may not align with financial periods.

Steps for Calculation

1. Find Monthly Expense: Divide total amount by the number of months in the invoice period.

2. Determine Amount Due: Multiply the monthly expense by the number of months corresponding to the financial reporting period.

3. Aggregate Multiple Invoices: If applicable, sum amounts from multiple invoices affecting the financial period to get the total due.

Worked Example

• Case: Soraia's rent payment for February 2023 to January 2024 ($6,420).

  • For income statement (May 2023 to April 2024), include only relevant months (February to April: 9 months).

  • Monthly: $6,420 / 12 = $535. So, total for expense in IS = $535 × 9 = $4,815.

  • Current Period Total: Add any other applicable expenses to get the final figure for the income statement.

Accrued Expenses

Characteristics

• Accrued expenses are recognized as liabilities since they represent amounts owed at the end of a financial period.

Recording Accrued Expenses

1. If there's an accrual, the expense account will show a credit balance.

2. Detail Calculation:

   • Example: For rent of $6,420 and $8,040 calculations involving monthly distributions and how many months apply to the reporting period.

     • Example Calculation Results:

     • For $6,420: $535 × 9 = $4,815

     • For $8,040: $670 × 3 = $2,010

     • Total to income statement: $4,815 + $2,010 = $6,825.

Prepaid Expenses

Understanding Prepaid Expenses

• Considered an asset; the business overpaid for expenses related to future benefits.

Recording Prepaid Expenses

1. Record the payment made in advance as a debit in the expense account.

2. This indicates future benefits belonging to the next period will be received in due time.

Accrued Income

Understanding Accrued Income

• Recognized as income that the business is owed at the end of a financial period.

• Essentially amounts to be received from customers in future financial periods.

Recording Accrued Income

1. Debit Balance indicates receivables that the business has not yet received payments for.

2. Find total due for the reporting period:

   • Divide total income by periods to determine relevant parts for each period.

Worked Example

• Example: Tomas receives commission - account for income periods and amounts due.

  • $3,000 from March 2023 to February 2024, include relevant months for payment in the income statement.