1. Accruals and Prepayments

2. 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.

3. 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)

4. Accrued Expenses/ Other Payables

5. 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

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

7. Prepaid Expenses/ Other Receivables

8. 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
$ Feb 2005
30 June 2005
$ Aug. 2005
30 Sept. 2005
31 Dec. 2005
$ Nov. 2005

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

10. 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.

11. 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

12. Stationery $ $
Dec 31 Bank ,200
Dec 31 Profit and loss ,800
Dec 31 Stock c/d
2,200
2,200
2006
Jan Stock b/d
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.

13. Accrued Income/ Other Receivables

14. 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

15. Rent receivable Dec 31 Profit and Loss 800 Apr 5 Bank 200$ $
Dec 31 Profit and Loss
Apr 5 Bank
Jul Bank
Oct Bank
Dec 31 Accrued c/d
800
800
2006
Jan Accrued b/d

16. Income Received in Advance / Other Payables

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

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

19. 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.

20. Rent and Rates Jan 1 (Rent) prepaid b/d 1,000$ $
Jan 1 (Rent) prepaid b/d ,000
Jan 1 (Rates) owing b/d
Dec 31 Bank: rent ,500
Dec 31 Profit and loss ,000
Dec 31 Bank: rates ,000
Dec 31 (Rates) prepaid c/d
Dec 31 (Rent) Owing c/d
11,000
11,000
2006
2006
Jan 1 Prepaid b/d
Jan 1 Owing b/d