1. Introduction to Accounting
Accruals and Prepayments
Carriage Inwards and Carriage Outwards
Lecturer: Chara Charalambous

2. Lecturer: Chara Charalambous
Learning Outcomes
To understand the concept of
accruals and prepayments
Accrued expenses
Prepaid expenses
Accrued income
Prepaid income
Lecturer: Chara Charalambous

3. Accruals Basis of Accounting
The income statement for a period is prepared following the
accruals concept: the income and expenses are recorded as
they happened in the period regardless of whether cash has
been received or paid .
Therefore the profit of e.g. Y12 is calculated as following:
Sales Y12 ( not only cash sales but also credit sales)
Less Purchases Y12 (not only cash purchases but also credit purchases)
Plus other income - e.g. from interests or rents (paid to the firm and
this not paid yet but third parties owe the income to the company because It concerns the specific period)
Less Expenses happened in Y12 ( rent, electricity ,telephone paid and
those not paid yet but they concern the period we study and the firm has debt on them)
RESULT : NET PROFIT/LOSS
Lecturer: Chara Charalambous

4. Lecturer: Chara Charalambous
Accrued expenses
those which have been used up in the current year, but have not yet been paid for.
Prepaid expenses
those to be used in the following period but have been paid for in advance.
Accrued income
those which have been earned in the current period but have not yet been received.
Prepaid income
those to be earned in the following period but have been received in advance.
Lecturer: Chara Charalambous

5. Lecturer: Chara Charalambous
1. Accrued Expenditure
An accrual arises where expenses of the business, relating to the year, have not been paid by the year end.
In this case the expense not paid it included in the total expenses in the income statement, and therefore deducted from the income so as to calculate the Net Profit, and it also goes to Balance sheet in the current liabilities side and is called Accrued Expenses.
Lecturer: Chara Charalambous

6. Lecturer: Chara Charalambous
Double entry in Journal:
Dr: Expense x
Cr: Bank x
Cr: Accruals a/c x
Lecturer: Chara Charalambous

7. Lecturer: Chara Charalambous
Example 1:
The electricity bill for the company A Ltd was for the year end 31st Dec Y12 € But in Y12 it was paid only €9000 and the rest €3000 was paid in Jan of Y13.
Required: 1.Prepare the accounts in the General ledger affected from the above transactions and 2.show where each amount finally goes.3.Prepare the extract of B/ce Sheet and the Profit and loss a/c
Lecturer: Chara Charalambous

8. Lecturer: Chara Charalambous
2. Prepaid Expenditure
A prepayment arises where some of the following year’s expenses have been paid in the current year.
In this case, it is necessary to remove that part of the expense which is not relevant to this year, and therefore must not be deducted from the income of this year, and create a corresponding account in the Balance Sheet in the side of assets named Prepaid expenses.
Lecturer: Chara Charalambous

9. Lecturer: Chara Charalambous
Double entry in Journal:
Dr: Expense x
Dr: Prepayments x
Cr: Bank x
Lecturer: Chara Charalambous

10. Lecturer: Chara Charalambous
Example 2:
The insurance bill for the company A Ltd was for the year end 31st Dec Y12 € But in Y12 it was paid €30000 for insurance expenses. The owner of the company wanted to prepaid in this way future charges of insurance.
Required: 1.Prepare the accounts in the General ledger affected from the above transactions and 2.show where each amount finally goes.3.Prepare the extract of B/ce Sheet and the Profit and loss a/c
Lecturer: Chara Charalambous

11. Lecturer: Chara Charalambous
3. Accrued Income
Accrued income arises where income has been earned in the accounting period but has not yet been received. In this case we mean the income from other sources than the clients for e.g. the bank interest, rents e.t.c)
In this case, it is necessary to record the whole (paid + unpaid) income in the income statement and create a corresponding asset in the statement of financial position (called accrued income).
Lecturer: Chara Charalambous

12. Lecturer: Chara Charalambous
Example 3:
A business earns income in Y12 from bank interest €300 per month. However during Y12 the business received only €3000 instead of €3600 (300*12).
Required: 1.Prepare the accounts in the General ledger affected from the above transactions and 2.show where each amount finally goes. 3.Prepare the extract of B/ce Sheet and the Profit and loss a/c
Lecturer: Chara Charalambous

13. Lecturer: Chara Charalambous
4. Prepaid Income
Prepaid income arises where income has been received in the accounting period but which relates to the next accounting period.
In this case, it is necessary to remove the income not relating to the year from the income statement and create a corresponding/resulting current liability in the statement of financial position (called prepaid income).
Lecturer: Chara Charalambous

14. Lecturer: Chara Charalambous
Example 4:
A business rents out a property at an income of € 4000 per month. €64000 has been received in the year ended 31 Dec Y12.
Required: What is the year-end liability and what is the rental
income for the year? Show the relevant entries in the ledger
accounts and the financial statements.
Lecturer: Chara Charalambous

15. Carriage Inwards and Carriage Outwards
Carriage refers to the costs of transporting goods to and from the firm.
From the buyer’s point of view, the delivery charge would he referred to as “carriage inwards”. Any such carriage charges should be debited to the carriage inwards account in the general ledger.
The carriage inwards account is written off to the trading account at the end of the accounting period.
Lecturer: Chara Charalambous

16. Lecturer: Chara Charalambous
When the buyer sells the goods to his customer, he incurs further delivery charges. This cost is referred to as ‘carriage outwards”. These costs are debited to the carriage outwards account in the general ledger.
Any carriage outwards charges are usually included in an item called ‘selling and distribution costs”.   Since this cost is incurred after the goods have been made ready for sale, the account is written off to the profit and loss account at the end of the accounting period.
Each type of carriage will be an expense and therefore will have a debit balance in the trial balance. However, these two carriages will appear in different sections of the trading and profit and loss account.
Lecturer: Chara Charalambous

17. Accounting Treatment of Carriage Inwards and Carriage Outwards
Journal  Entry for Carriage Inwards:
Debit   Carriage Inwards
Credit    Bank
Journal  Entry for Carriage Outwards:
Debit   Carriage Outwards
Treatment in Trading, Profit and Loss Accounts:
Carriage inwards Trading account expense
Carriage outwards Profit & loss account expense
Lecturer: Chara Charalambous

18. Why different treatment?
Carriage inwards is connected with the cost of getting goods into the business and ready for sale. As a result, it will be added on in the calculation for the cost of goods sold. Carriage outwards does not have anything to do with the cost of getting goods into saleable condition. Therefore it will appear with all the other overhead expenses in the profit and loss account.
Good to know:
Nowadays, the price quoted for goods being purchased will usually be inclusive of any delivery charge, and so a separate charge for carriage inwards (or outwards) is not very common. In cases where separate carriage inwards charges are incurred, the cost should be added on to the cost of purchases in the trading account. Consequently, a proportion of carriage inwards charges should be added to the purchase cost when determining the cost of closing stock.
Lecturer: Chara Charalambous