1. Accruals & Prepayments

2. 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

3. Accrued expense AmountRent dueRent paid £100031 March 2011 £100030 June 20112 July 2011 £100030 September 20114 October 2011 £100031 December 20115 January 2012 Assume that rent of £4,000 per year is payable at the end of every three months.

4. Accrued expense DrCrRent a/c March31 2011 Cash 1,000 July2 2011 Cash 1,000 Oct4 2011 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

5. Accrued expense DrCrRent a/c March31 2011 Cash 1,000 July2 2011 Cash 1,000 Oct4 2011 Cash 1,000 Dec31 2011 Accrued c/d 1000 To rectify this, the £1,000 that is owed must be ‘carried down’ to 2012

6. Prepaid expenses AmountRent dueRent paid £21031 March 2011£210 28 February 2011 £210 30 June 2011 30 September 2011£420 31 August 2011 £21031 December 2011£420 18 November 2011 Insurance for a business is £840 per annum. The business pays at a rate of £210 every three months

7. Prepaid expenses DrCrInsurance a/c Feb28 2011 Bank 420 Aug31 2011 Bank 420 Nov18 2011 Bank 420 Dec31 2011 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.

8. Prepaid expenses DrCrInsurance a/c Feb28 2011 Bank 420 Aug31 2011 Bank 420 Nov18 2011 Bank 420 Jan01 2012 PrePaid b/d 210 Dec31 2011 P&L 840 Dec31 2012 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