Accruals and Prepayments Flashcards

Accruals

Accrual definition: Income or expenses that have occurred during the period but are unpaid at the end of the year.
- Example: Electricity bill for January to December accounting period.
  - By the end of September, nine months' worth of electricity has been paid.
  - Three months (October, November, December) need to be accrued.

Since it's an expense owed at the year-end, it's shown as a liability.
- Debit the expense account.
- Credit accrued expenses in the liabilities section of the Statement of Financial Position.
Accrued Income: Income included in the period and considered an asset at the end of the year.
- Debit accrued income.
- Credit the income account.

Prepayment definition: Income or expenses that are paid for in advance of the period they relate to.
- Example: Rent paid for fifteen months (up to March of the next year) when the accounting period is January to December.
  - The three months (January, February, March) are prepayments and need to be removed from the current year's expenses.

These have been paid in advance, so they're not included in your expenses as they do not relate to your year. So you need to remove them from expenses.
- Credit the expense account to reduce it.
- Debit the prepayment account, which is a current asset.
  - Prepaid rent means you're owed the use of the property for those months.
Deferred or Prepaid Income: Income received in advance but related to the next year.
- Remove it from current year's income.
  - Debit the income account.
  - Credit deferred income, which is a liability on the Statement of Financial Position.
    - Represents a service owed to someone who has paid in advance.

Definitions: Understand the definitions of accruals and prepayments.
Timelines: Draw timelines to visualize the periods involved, especially when confused about whether to accrue or prepay.