Assume the Position

ACT 1100 Introduction to Accounting Lecturer: Troy J. Wishart Summer Course

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Lecture Notes 4

Introduction Accrual Concept Accrual Concept - Revenue and Expenses are accrued, that is recognized as they are earned or incurred (and not as money is received or paid),…

Introduction Expenses are charged to the period in which they are incurred whether cash is paid or not. 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.

Introduction creditors and debtors Accruals and prepayments are like creditors and debtors, except that there is no invoice awaiting payment.

Introduction Common examples of prepayments Common examples of prepayments are  Rent,  Rates,  Insurance And  Road Tax paid for in advance,

Introduction Common examples of accruals Common examples of accruals are  Electricity,  Gas and  Telephone Which are paid in arrears

Introduction Accruals are liabilities and usually have a credit balance Accruals are liabilities and usually have a credit balance Prepayments are Assets and usually have a debit balance Prepayments are Assets and usually have a debit balance

Introduction There can be:  Accrued Expense  Prepaid Expense  Accrued Income  Prepaid Income

Introduction  There is difference between... INCURRE D PAIDPAID EXPENSES

Introduction  There is difference between... EARNEDEARNED RECEIVEDRECEIVED REVENUE

Introduction  Expenses are therefore, time related  Expenses are therefore, time related, and are charged to the period to which they relate.

Accrued Expenses firm has used not yet been paid for An expense that the firm has used, but which has not yet been paid for.  Double Entry debited to the expense accountcredited to the accrual account. Accruals are debited to the expense account so as to increase it and credited to the accrual account.

Accrued Expenses 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.

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: AmountRent DueRent Paid $75,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 March 31, 2011 July 2, 2011 October 4, 2011 January 5, 2012

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

Prepaid Expenses expense to be used up paid for in advance. An expense to be used up in a following period, but which has been paid for in advance.  Double Entry credited to the expense accountdebited to the prepayment account. Prepayments are credited to the expense account to reduce it and debited to the prepayment account.

Prepaid Expenses 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.

Prepaid Expenses transaction would require a transfer to the period it is related to. Such a transaction would require a transfer from the period in which it was paid to the period it is related to.

Prepaid Expenses – Example Insurance for a firm is at the rate of 120,000 a year, starting January 1, 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: AmountInsurance DueInsurance Paid $30,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 February 28, 2011 – $30,000 August 31, $60,000 November 18, $60,000

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

Opening and Closing Accruals and Prepayments Lecture Notes 4

Opening and Closing Prepaid Expenses –MODEL 2011 Expense Account Jan 1 Dec 31 Prepaid Bal b/d Accrued Bal c/d Prepaid Bal. (c/d) 00,000 Dec 31 Profit and Loss A/c 00, ,000 Dec 31 Accrued Bal b/dJan 100,000 Payments 00,000

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: AmountRent DueRent Paid $75,000 December 31, 2010 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 March 31, $150,000 July 2, 2011 – $75,000 October 4, 2011 – $75,000 January 5, 2012 – $75,000

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

Prepaid Expenses – Example Insurance for a firm is at the rate of 120,000 a year, starting January 1, 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: AmountInsurance DueInsurance Paid $30,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 December 31, $30,000 February 28, 2011 – $30,000 August 31, $60,000 November 18, $30,000

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

Accrued Income Lecture Notes 4

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: AmountRent DueRent Received $15,000 March 31, 2011 June 30, 2011 September 30, 2011 December 31, 2011 April 4, $15,000 July 6, 2011 – $15,000 October 9, $15,000 January 7, $15,000

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

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