1. Accruals & Prepayments
Mark Fielding-Pritchard
mefielding.com

2. Principle
Sally moves to New York from London. She goes to work by metro. On 1 January 2016 she buys a one year metro/subway/underground ticket paying in cash $1200. The ticket allows unlimited travel all year, 2016, on the metro.
When her mother asks how much does it cost to travel on the metro does Sally answer
It costs $1200 on 1 January but it is free the rest of the year, or
Does she answer $100 a month?
1) Is the cash basis, 2) is the accruals. Accruals basis recognizes expenses when the arise, not when they are incurred
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3. Accruals Dr Cr Accrual Telephone 12 Accruals
An accrual is an expense we have incurred, but where we have not yet received the invoice ie mobile phone
You talk today for 2 hours on 31/12 on your mobile. The bill will come in 1 week. How much is the month end accrual if you pay 10c a minute? Dr Cr
Accrual
Telephone 12
Accruals
Accruals are shown as a current liability in the BS
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4. Interactive Question 1 P234
2002
Cash paid
Accrual
327.68
x 2/3
Expense
Journal
Dr Electric
Cr Accruals
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5. Prepayment Dr Cr Prepayment Prepayments 100 Telephone
A prepayment is an expense we have not yet incurred, but where we have paid in advance
You pay in advance your mobile. You pay on 31/12 $100 for January Dr Cr
Prepayment
Prepayments
100
Telephone
Remember during the year we cash account. Accruals and prepayments are a period end adjustment. When you pay your phone it will, at that time debit the expense account.
Prepayments are shown as a current asset in the BS
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6. Reversals- Accruals See Interactive Q1.1 P234
Dr Accrual
Cr Expense
2002
Cash paid
Accrual
327.68
x 2/3
Expense
31/12/02
Dr Electric
Cr Accruals
2003
Opening Accrual
(327.68)
Cash paid
Accrual
502.16
x 2/3
Expense
31/12/03
Dr Electric
Cr Accruals
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7. Reversals- Prepayments See Interactive Q1.1 P234
Assume payments made in advance !!!
2002
Cash paid
Prepayment
(39.09)
x 1/3
Expense
31/12/02
Dr P’pay 39.09
Cr Expense 39.09
Reversal 1/1/03
Dr Expense 39.09
Cr P’pay 39.09
2003
Opening P’pay
39.09
Cash paid
P’pay
(206.67)
620 x 1/3
Expense
31/12/03
Dr P’pay
Cr Expense
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8. Interactive Q2 P238 2006 P&L 2006 Cash December 2005 salary
Team (12000)
8000
2006 Salary
Team (13200)
105600
96800
Trainee
4200
3500
109800
108300
Op Accrual
(8000)
Cash paid
108300
Cl Accrual
9500
109800
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9. Interactive Q3 P239 Rental PP Copy Ac @31August x4 1400 500
Op Accrual
(500)
Op PP
1400
Cash paid Rental
9000
Cash paid Copy
6350
Cl Accrual
650
Cl PP
(1800)
15100
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10. Interactive Q4 P241 P&L Sales 156000 Op Inv 10000 Purchases 65000
Carriage In
1000
Cl Inv
(13000)
(63000)
93000
Distribution (10+2)
12000
Admin ( )
16500
Finance
(5000)
(33500)
59500
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11. Interactive Q4 P241 Balance Sheet Assets NCAs 200000 Current Assets
Inventory
13000
Receivables
54000
Prepays
1500
Cash
14000
82500
282500
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12. Interactive Q4 Balance Sheet Liabiities Capital Bal b/f 180000 c/y
59500
239500
Current Liabilities
Payables
40000
Accruals
3000
43000
282500
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13. Interactive Q5 P241 Admin Expenses Credit purchases 10500
Cash purchases
250
Accrual
(100)
Ppay
150
10800
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14. Income- Deferred & Accrued
Deferred Income- payment received in advance for work we haven’t done yet
Accrued income- income due to us but for which no invoice has been raised, bank interest
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15. Worked Example P242 Revenue Dr Cr Deposits Initial Entry Cash 1200
31/12
Deferred Income
When work done
Bonus
Receivables
500
(Accrued Income) Revenue
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