Accruals and Prepayments

Prepayments and Accruals Expenses and revenues are not always paid or received on time. Cash paid and received in a year should not be entered directly into the Income Statement that year. Adjustments should be made.

Prepaid expenses Accrued expenses Prepaid income Accrued income those to be used in the following period but have been paid for in advance. (paid but not due yet) Accrued expenses those which have been used up in the current year, but have not yet been paid for. (due but not paid yet) Prepaid income those to be earned in the following period but have been received in advance. (received but not due yet) Accrued income those which have been earned in the current period but have not yet been received. (due but not received yet)

Accrued Expenses/ Other Payables

Accrued expenses (Other Payables) Assume that rent of $1,000 per year is payable in four equal installments ($250 every 3 months ie every quarter) at the end of every 3 months. The rent was not always paid on time Amount Rent due Rent paid $250 31 March 2005 30 June 2005 2 July 2005 30 Sept. 2005 4 Oct. 2005 31 Dec. 2005 5 January 2006

Rent Dec 31 Profit and loss 1,000 Mar 31 Bank 250 Jul 2 Bank 250 2005 $ 2005 $ Dec 31 Profit and loss 1,000 Mar 31 Bank 250 Jul 2 Bank 250 Oct 4 Bank 250 Dec 31 Accrued c/d 250 1,000 1,000 2006 Jan 1 Accrued b/d 250

Prepaid Expenses/ Other Receivables

Prepaid expenses (Other Receivables) Insurance for a firm is at the rate $840 a year, starting from 1 January 2005. The firm has agreed to pay this at the rate of $210 every 3 months (quarterly). Amount Insurance due Insurance paid $210 31 March 2005 $210 28 Feb 2005 30 June 2005 $420 31 Aug. 2005 30 Sept. 2005 31 Dec. 2005 $420 18 Nov. 2005

Insurance Feb 28 Bank 210 Dec 31 Profit and loss 840 Aug 31 Bank 420 2005 $ 2005 $ Feb 28 Bank 210 Dec 31 Profit and loss 840 Aug 31 Bank 420 Dec 31 Prepaid c/d 210 Nov 18 Bank 420 1,050 1,050 2006 Jan 1 Prepaid b/d 210

Prepayment will also happen when items other than purchases and non current assets, are bought for use in the business, and they are not fully used up/consumed in the period. For instance, stationery is normally not entirely used up over the period in which it is bought.

Example Year ended 31 December 2005 Stationery bought in the year $2,200 Stock of stationery on hand (unused stationery) as at 31 December 2005 $400

Stationery 2005 $ 2005 $ Dec 31 Bank 2,200 Dec 31 Profit and loss 1,800 Dec 31 Stock c/d 400 2,200 2,200 2006 Jan 1 Stock b/d 400 The stock of stationery is not added to the inventory of unsold goods on hand in the balance sheet, but is added to the other prepayments of expense.

Accrued Income/ Other Receivables

Accrued income (Other Receivables) Assumed our warehouse is larger than we need. We rent part of it to another firm for $800 per annum. Amount Rent due Rent received $200 31 March 2005 4 April 2005 30 June 2005 6 July 2005 30 Sept. 2005 9 Oct. 2005 31 Dec. 2005 7 Jan. 2006

Rent receivable Dec 31 Profit and Loss 800 Apr 5 Bank 200 2005 $ 2005 $ Dec 31 Profit and Loss 800 Apr 5 Bank 200 Jul 6 Bank 200 Oct 9 Bank 200 Dec 31 Accrued c/d 200 800 800 2006 Jan 1 Accrued b/d 210

Income Received in Advance / Other Payables

Example Example: Sublet premises at $2400 per year on 1 Jan 2013. The tenant made the following payments: 1Jan $600; 1 April $600; 1 July $600; 1 Oct $1200.

Rent receivable Jan 1 Bank 600 Dec 31 Received in Advance c/d 600 2013 $ 2013 $ Dec 31 Profit and Loss 2400 Jan 1 Bank 600 Dec 31 Received in Advance c/d 600 Apr 1 Bank 600 July 1 Bank 600 Oct 1 Bank 1200 3000 3000 2014 Jan 1 Received in Advance c/d 600

Example Rent and rates are joined together. Rent is payable $6000 per annum Rates is payable $4,000 per annum At 1 Jan 20x5 rent $1,000 had been prepaid in 20x4. On 1 Jan 20x5 rates were owed of $400. During 20x5 rent was paid $4,500. During 20x5 rates were paid $5,000. On 31 Dec 20x5 rent $500 was owing. On 31 Dec 20x5 rates of $600 had been prepaid.

Rent and Rates Jan 1 (Rent) prepaid b/d 1,000 2005 $ 2005 $ Jan 1 (Rent) prepaid b/d 1,000 Jan 1 (Rates) owing b/d 400 Dec 31 Bank: rent 4,500 Dec 31 Profit and loss 10,000 Dec 31 Bank: rates 5,000 Dec 31 (Rates) prepaid c/d 600 Dec 31 (Rent) Owing c/d 500 11,000 11,000 2006 2006 Jan 1 Prepaid b/d 600 Jan 1 Owing b/d 500