Accruals_PPs_and_sole_trader_financial_statements_Lecture_PowerPoints_2024-25

ACFI101 TOPIC 5

• Accruals, Prepayments & Financial Statements of Sole Traders

• Instructor: Lewis Gordon

• Attendance code: 1

Session Overview

• Feedback and discussions

• Concepts Covered:

  • Accruals and Prepayments

  • Prompt Payment Discounts (discounts allowed and discounts received)

  • Carriage Inwards & Carriage Outwards

  • Minor Sources of Income for Businesses

  • Preparing Financial Statements for Sole Traders

  • Advice for Mid-term Test Preparation

Accruals and Prepayments

• Financial statements prepared on an accrual basis (matching principle):

  • Record all income earned in the period in the SPL regardless of cash receipt.

  • Record all expenses related to that income, regardless of cash payment.

• Need for adjustments: Accruals (accrued expenses) and Prepayments (prepaid expenses).

Accruals (Accrued Expenses)

• Definition: Incurred expenses not yet paid, no invoice received before the accounting period ends.

• Common examples: Gas, electricity, wages, interest.

  • Amounts may be provided or estimated based on prior costs.

Example: Amir’s Business

• Business starts on 1 January 20X1.

• Paid £300 in electricity; estimates £100 accrued in Q4 20X1, no invoice yet.

• Adjustment:

  • Dr Electricity £100 (increase in expense)

  • Cr Accruals £100 (increase in liability)

• Financial Statement Reflection:

  • Current Liabilities Section: Accruals £100

  • SPL: Total Electricity Expenses £400 (£300 actual + £100 accrued).

Double Entry for Accruals

• Current Year:

  • Dr Accruals £100

  • Cr Electricity £100

• Carry forward to the next year (reversal of accruals and new accrual adjustment).

Example: 20X2 Operations

• Paid £550 for electricity, estimated £150 accrued, reversing 20X1 accrual:

  • Reversal: Dr Accruals £100, Cr Electricity £100

  • New accrual: Dr Electricity £150, Cr Accruals £150.

• Total cost in 20X2: £600.

Prepayments (Prepaid Expenses)

• Definition: Expenses paid in advance for benefits to be received in the following period.

• Common in insurance, rent, maintenance.

• Requires calculations to ascertain costs of benefits remaining.

• Treated as an asset since it represents future benefits.

Example: Molly’s Business

• Six-month maintenance contract paid upfront £600 starting 1 September.

• As at 31 December, 2 months are prepaid (2 months x £100).

• Adjustment:

  • Dr Prepayments £200

  • Cr Maintenance £200

• Financial Statements:

  • Current Assets: Prepayments £200

  • SPL: £400 maintenance expense.

Discounts for Prompt Payment

• Definition: Discounts for early invoice payment offered by suppliers/customers.

• Differentiate between:

  • Discounts Allowed: Given by businesses; deducted from sales in SPL.

  • Discounts Received: Taken when paying suppliers; deducted from purchases in SPL.

Illustrative Examples of Discounts

• Discounts Allowed Example:

  • Sale to Meg: £100 on 1st October; paid £95 with a 5% discount (

  • Entry: 1 Oct Dr Meg £100; 7 Oct Cash at Bank Cr £95; Discounts Allowed Cr £5.

  • SPL: Sale appears as £95 (after discount).

• Discounts Received Example:

  • Purchase from Joe valued at £200; paid £180 with a 10% discount.

  • Entry: 1 May Purchases Dr £200; 9 May Cash at Bank Cr £180; Discounts Received Cr £20.

Minor Sources of Income

• Other income types include:

  • Royalties, license fees, commissions, rent received.

• Report on SPL after gross profit calculation, before operating expenses.

Test Preparation Guidance

• Recommended practices include:

  • Completing lecture questions.

  • Engaging with ACFI101 Topic Quizzes.

  • Practicing specimen papers available on Canvas.

  • Revisiting lecture recordings as needed.

• Exam logistics:

  • Bring Student ID, calculator, pens/pencils.

  • Show workings efficiently in answer booklet.