1. Because, My Belief Determines my Destination
Our Confession
ACT 110
Is EASY POP!
Because, My Belief Determines my Destination

2. Accruals and Prepayments
Lecture Notes 4
Accruals and Prepayments

3. 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.

4. 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.

5. 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

6. 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

7. 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.

8. Accruals & Prepayments
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:
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, $60,000
November 18, $60,000

9. 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

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

11. 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, $150,000
July 2, 2011 – $75,000
October 4, 2011 – $75,000
January 5, 2012 – $75,000

12. 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

13. Accruals & Prepayments
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:
Amount
Insurance Due
Insurance 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

14. 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

15. 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

16. Lecture Notes 4
Accrued Income

17. 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, $15,000
July 6, 2011 – $15,000
October 9, $15,000
January 7, $15,000

18. 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

19. Because, Passion is my Fuel
Our Confession
ACT 110
Is EASY POP!
Because, Passion is my Fuel