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Accruals and Prepayments Lecture Notes 4 Accruals and Prepayments

Accruals & Prepayments Introduction Accrual Concept - Revenue and Expenses are accrued, that is recognized as they are earned or incurred (and not as money is received or paid),... Therefore Expenses are charged to the period in which they are incurred, that is when the benefit would have been obtained by business, whether cash is paid or not. Expenses are therefore, time related, and are charged to the period to which they relate. Accruals and prepayments are determined at the end of the financial period under review.

Accruals & Prepayments Accrued Expenses An expense that the firm has used, but which has not yet been paid for. If an expense is incurred in one period, that is the benefit was obtained, but paid for in a future period, the transaction must be reported in the period that it was incurred and not the period that it was paid.  Accruals are debited to the expense account so as to increase it and credited to the accrual account.

Accruals & Prepayments Accrued Expenses – Example Assume that rent of $300,000 per year is payable at $75,000 at the end of every three months. The rent was not always paid on time. Details were as follows: Amount Rent Due Rent Paid $75,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 July 2, 2011 October 4, 2011 January 5, 2012

Accruals & Prepayments Accrued Expenses – Example The rent account for the Year ended December 31, 2011 is as follows: 2011 2012 Rent Account Mar 31 Bank 75,000 Dec 31 Profit and Loss A/c 300,000 July 2 Bank 75,000 Oct 4 Bank 75,000 Dec 31 Accrued Balance (c/d) 75,000 300,000 300,000 Jan 6 Bank 75,000 Jan 1 Accrued Bal b/d 75,000

Accruals & Prepayments Prepaid Expenses An expense to be used up in a following period, but which has been paid for in advance. If an expense is paid for in one period for a future period, it is not related to the period in which it was paid, It must be charged to the future period. Such a transaction would require a transfer from the period in which it was paid to the period it is related to. Prepayments are credited to the expense account to reduce it and debited to the prepayment account.

Accruals & Prepayments Prepaid Expenses – Example Insurance for a firm is at the rate of 120,000 a year, starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows: Amount Insurance Due Insurance Paid $30,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 February 28, 2011 – $30,000 August 31, 2011 - $60,000 November 18, 2011 -$60,000

Accruals & Prepayments Prepaid Expenses – Example The insurance account for the Year ended December 31, 2011 is as follows: 2011 Insurance Account Feb 28 Bank 30,000 Dec 31 Profit and Loss A/c 120,000 Aug 31 Bank 60,000 Prepaid Balance (c/d) Dec 31 Nov 18 Bank 60,000 30,000 150,000 150,000 Jan 1 Prepaid Bal b/d 30,000

Opening and Closing Accruals and Prepayments Lecture Notes 4 Opening and Closing Accruals and Prepayments

Accruals & Prepayments Opening and Closing Accrued Expenses – Example Assume that rent of $300,000 per year is payable at $75,000 at the end of every three months. The rent was not always paid on time. Details were as follows: Amount Rent Due Rent Paid $75,000 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 March 31, 2011 - $150,000 July 2, 2011 – $75,000 October 4, 2011 – $75,000 January 5, 2012 – $75,000

Accruals & Prepayments Opening and Closing Accrued Expenses The rent account for the Year ended December 31, 2011 is as follows: 2011 2012 Rent Account Mar 31 Bank 150,000 75,000 Jan 1 Accrued Bal b/d July 2 Bank 75,000 Dec 31 Profit and Loss A/c 300,000 Oct 4 Bank 75,000 Dec 31 Accrued Balance (c/d) 75,000 375,000 375,000 Jan 1 Accrued Bal b/d 75,000 Jan 6 Bank 75,000

Accruals & Prepayments Prepaid Expenses – Example Insurance for a firm is at the rate of 120,000 a year, starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows: Amount Insurance Due Insurance Paid $30,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 December 31, 2010 -$30,000 February 28, 2011 – $30,000 August 31, 2011 - $60,000 November 18, 2011 -$30,000

Accruals & Prepayments Opening and Closing Prepaid Expenses – Example The insurance account for the Year ended December 31, 2011 is as follows: 2011 Insurance Account Jan 1 Prepaid Bal c/d 30,000 Dec 31 Profit and Loss A/c 120,000 Feb 28 Bank 30,000 Prepaid Balance (c/d) Dec 31 Aug 31 Bank 60,000 30,000 Nov 18 Bank 30,000 150,000 150,000 Jan 1 Prepaid Bal b/d 30,000

Accruals & Prepayments Opening and Closing Prepaid Expenses – Example The insurance account for the Year ended December 31, 2011 is as follows: 2011 Expense Account Jan 1 Prepaid Bal c/d 00,000 Jan 1 Accrued Bal c/d 00,000 Payments 00,000 Dec 31 Profit and Loss A/c 00,000 Dec 31 Accrued Bal c/d 00,000 Dec 31 Prepaid Bal. (c/d) 00,000 000,000 000,000

Lecture Notes 4 Accrued Income

Accruals & Prepayments Accrued Income – Example Our warehouse is lager than we need. We rent part of it to another firm for $60,000 per annum. Details for the year ended December 31 were as follows: Amount Rent Due Rent Received $15,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 April 4, 2011 - $15,000 July 6, 2011 – $15,000 October 9, 2011 - $15,000 January 7, 2012 -$15,000

Accruals & Prepayments Accrued Income The Rent Income account for the Year ended December 31, 2011 is as follows: 2011 2012 Rent Income Account Dec 31 Profit & Loss A/c 60,000 April 4 Cash 15,000 July 6 Cash 15,000 Oct 9 Cash 15,000 Dec 31 Accrued Balance (c/d) 15,000 60,000 60,000 Jan 1 Accrued Bal b/d 15,000 Jan 7 Cash 15,000

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