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Accruals and Prepayments

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by

Amanda Abraham

on 15 September 2015

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Transcript of Accruals and Prepayments

Matching Concept
Accruals concept is also known as the matching concept because of the way it strives to match costs against the revenues generated by incurring those costs.

Revenues should be recognised in the period in which they are earned, not necessarily when they are received in cash.

In the same way, expenses are recognised according to the period to which they relate, and not when they are paid.
Impact on profit or net assets
Adjustments needed
Accrued Expenses

Accrued expenses (accruals) are expenses which relate to an accounting period but have not been paid for.

Accruals are included in payables as current liabilities as they represent liabilities which have been incurred but for which no invoice has yet been received.

Accounting Treatment: Accruals
Dr Expense (I/S)
Cr Accruals (SOFP)
Adjustments needed
Prepaid expenses (prepayments) are expenses which have already been paid but relate to a future accounting period.

Prepayments are included in receivables in current assets in the statement of financial position.

They are assets as they represent money that has been paid out in advance of the expense being incurred.

Accounting Treatment: Prepayments
Dr Prepayments (SOFP)
Cr Expense (I/S)
Reversals of accruals and prepayments

At the beginning of the year, reverse opening accrual or prepayment
Double-entry: -
1. Reversal of an accrual
Dr Accruals (SOFP)
Cr Expense (I/S)

2. Reversal of a prepayment
Dr Expense (I/S)
Cr Prepayment (SOFP)

3. Post the cash paid during the year

4. Post any closing accrual or prepayment

5. Balance off the expense and accruals/prepayments accounts
Accrued and deferred income
An entity will accrue income when it has earned the income during the period but it has not yet been invoiced or received.

Dr Accrued income (SOFP)
Cr Income Account (I/S)

When an entity has received income in advance of it being earned, it should be deferred to the following period.

Dr Income Account (I/S)
Cr Deferred Income (SOFP)
Accruals and Prepayments
Thank you!
Full transcript