Accruals & Prepayments

Example The rent for the office is £6,000 per annum The business pays £5,000 in the year and therefore owes £1,000 for rent. (Accrued expense) Rent used up = £6,000 Rent paid for = £5,000 _____________________________________________________ The business pays £6,500 this year for rent. This figure includes £500 paid in advance for the following year. (Pre-paid expense) Rent used up = £6,000 Rent paid for = £6,500

Accrued expense AmountRent dueRent paid £ March 2011 £ June July 2011 £ September October 2011 £ December January 2012 Assume that rent of £4,000 per year is payable at the end of every three months.

Accrued expense DrCrRent a/c March Cash 1,000 July Cash 1,000 Oct Cash 1,000 The rent for the last quarter was paid in 2012 so will appear in the 2012 books The expense for 2011 is £4,000. as it is an expense it is charged to the profit & loss a/c. However the two accounts do NOT balance

Accrued expense DrCrRent a/c March Cash 1,000 July Cash 1,000 Oct Cash 1,000 Dec Accrued c/d 1000 To rectify this, the £1,000 that is owed must be ‘carried down’ to 2012

Prepaid expenses AmountRent dueRent paid £21031 March 2011£ February 2011 £ June September 2011£ August 2011 £21031 December 2011£ November 2011 Insurance for a business is £840 per annum. The business pays at a rate of £210 every three months

Prepaid expenses DrCrInsurance a/c Feb Bank 420 Aug Bank 420 Nov Bank 420 Dec P&L840 The last payment is not just for 2011, it can be split as £210 for the last three months of 2011 and the first three months of 2012.

Prepaid expenses DrCrInsurance a/c Feb Bank 420 Aug Bank 420 Nov Bank 420 Jan PrePaid b/d 210 Dec P&L 840 Dec PrePaid c/d 210 If £840 is posted to the debit of P&L at 31 December 2011, the insurance a/c will still have a debit of £210. it is a benefit paid for but not used up. The ‘asset’ needs carrying forward to 2012