Accruals and
prepayments
What’s Inside ?
Learning Objectives
hink Corner
Prepaid expenses
uiz Corner
Accruals and prepayments
Learning Objectives
After reading this chapter, you will be able to:

Briefly explain what accrual accounting is.

Explain the term ‘accrued expenses’ and adjust
expenses accounts for accruals.

Explain the term ‘prepaid expenses’ and adjust
expenses accounts for prepayments.

Explain the term ‘revenues in arrears’ and adjust
revenues accounts for amounts in arrears.

Explain the term ‘revenues in advance’ and adjust
revenues accounts for amounts in advance.

Disclose accruals, prepayments, revenues in arrears
and revenues in advance in a balance sheet.

Become familiarised with the alternative method of
recording.
Accrual accounting
Accrual accounting is based on the ____________.
accrual concept
Accrual concept states that:
 Revenues are recognised in the profit and loss
account for the period in which they have been
earned, not when they are received.
 Expenses are recognised in the profit and loss
account for the period in which they have been
incurred, not when they are paid.
Therefore, when we draw up the profit and loss
account at the year end, we need to make
adjustments to _______
revenues and _______
expenses for any
accruals and __________.
prepayments
_______
Learning Objectives
Accrued expenses
Accrued expense is the expense _______
incurred in a period
paid for by the end of
but which has not yet been _______
that period.
Example 1: Longway Company paid electricity
charges every three months. The following are the
dates of payments:
Expenses due
Expenses paid
31 March 20X7
30 June 20X7
30 September 20X7
31 December 20X7
3 April 20X7
5 July 20X7
2 October 20X7
4 January 20X8
Amount
$
1,500
1,800
2,000
1,600
Accrued expenses
The total electricity charges for the year 20X7
should be ($1,500 + $1,800 + $2,000 + $1,600) =
$6,900. And this is the amount needed to be
profit and loss account at the
transferred to the __________________
year end.
However, at the year end, the electricity charges for
the last three months were still outstanding.
Electricity
20X7
Apr 3 Bank
Jul 5 Bank
Oct 2 Bank
$
1,500
1,800
2,000
Accrued expenses
This outstanding amount is called _____________
accrued expense or
accrual and is to be carried forward to the following
______
liability
year as a ______.
Electricity
20X7
Apr 3
Jul 5
Oct 2
Dec 31
Bank
Bank
Bank
Accrued c/f
The balance to be
carried forward to the
next financial year.
$
1,500
1,800
2,000
1,600
6,900
20X7
Dec 31 Profit and loss
$
6,900
The amount of
electricity
actually
paid
The
The
amount
amount
ofof
electricity
in the current
incurred
electricity
but incurred
notyear.
yet paid
in in the
6,900
current
the current
year. year.
Learning Objectives
Prepaid expenses
Prepaid expense is an expense which has been ____
paid
in a period but will not be incurred until the
_______
following period.
Example 2: Longway Company paid insurance
every three months. The following are the dates of
payments:
Expenses due
31 March 20X7
30 June 20X7
30 September 20X7
31 December 20X7
31 March 20X8
Expenses paid
28 March 20X7
25 June 20X7
27 September 20X7
Amount
$
5,000
5,000
5,000
29 December 20X7
10,000
Prepaid expenses
The total insurance for the year 20X7 should be
($5,000 x 4) = $20,000. And this is the amount
profit and loss
needed to be transferred to the ____________
account
______ at the year end.
At the year end, the company had paid three months’
insurance in advance.
Insurance
20X7
Mar 28
Jun 25
Sep 27
Dec 29
Bank
Bank
Bank
Bank
$
5,000
5,000
5,000
10,000
Prepaid expenses
This excess amount is called _____________
prepaid expense or
prepayment and is to be carried forward to the
_________
asset
following year as an _____.
Insurance
20X7
Mar 28 Bank
Jun 25 Bank
Sep 27 Bank
Dec 29 Bank
The amount of
insurance actually
paid in the current
year.
$
5,000
5,000
5,000
10,000
25,000
20X7
Dec 31 Profit and loss
“ 31 Prepaid c/f
$
20,000
5,000
The amount of
insurance
incurred
The amount
of insurance
The balance
to be 25,000
the current
paid butinwhich
has notyear.
been
carried forward to the
incurred in the current year.
next financial year.
hink Corner
uiz Corner
hink Corner
The amount paid for stationery is usually treated
as an expense. For the stock of unused
stationery at the end of a period, what is the
accounting treatment?
Stationery not entirely used up in the
nswer period in which it is bought should be
treated as a prepayment.
The balance of the stationery account should be carried
forward to the following period as a debit balance.
The stock of stationery is seldom added to the stock of
unsold goods in the balance sheet; it is added to other
prepayments.
Learning Objectives
Revenues in arrears
accrued revenue is other
Revenue in arrears (_____________)
revenue (other than sales) earned but which has
received in the period.
not yet been _______
Example 3: Longway Company received a commission
every three months. The following are the dates of
receipts:
Revenues due
31 March 20X7
30 June 20X7
30 September 20X7
31 December 20X7
Revenues received
4 April 20X7
2 July 20X7
5 October 20X7
6 January 20X8
Amount
$
10,000
8,000
12,000
9,000
Revenues in arrears
The total commission receivable for the year 20X7
should be ($10,000 + $8,000 + $12,000 + $9,000)
= $39,000. And this is the amount needed to be
transferred to the __________________
profit and loss account at the
year end.
At the year end, the company had not yet received
the commission for the 3 months to 31 December 20X7.
Commission Receivable
20X7
Apr 4 Bank
Jul 2 Bank
Oct 5 Bank
$
10,000
8,000
12,000
Revenues in arrears
This outstanding amount is called accrued
_____________
revenue
and is to be carried forward to the following year
asset
as an _____.
Commission Receivable
20X7
Dec 31 Profit and loss
The amount of
commission earned
in the current year.
$
39,000
39,000
20X7
$
Apr 4 Bank
10,000
Jul 2 Bank
8,000
Oct 5 Bank
12,000
Dec 31 In arrears c/f
9,000
The amount of commission
39,000
actually
received
in the
The amount
of commission
The balance to be
current
earned year.
but not yet received in
carried forward to the
the current year.
next financial year.
Learning Objectives
Revenues in advance
Revenue in advance (_____________)
prepaid revenue is the other
revenue which has been received in a period but
will not be earned
_____ until the following period.
Example 4: Longway Company received rent every
three months. The following are the dates of receipts:
Revenues due
Revenues received
31 March 20X7
30 June 20X7
30 September 20X7
31 December 20X7
31 March 20X8
24 March 20X7
27 June 20X7
25 September 20X7
Amount
$
10,000
10,000
10,000
26 December 20X7
20,000
Revenues in advance
The total rent receivable for the year 20X7
should be ($10,000 x 4) = $40,000. And this is
the amount needed to be transferred to the
profit
and loss account at the year end.
__________________
At the year end, the company has received the rent
for the 3 months to 31 March 20X8 in advance.
Rent Receivable
20X7
Mar 24
Jun 27
Sep 25
Dec 26
Bank
Bank
Bank
Bank
$
10,000
10,000
10,000
20,000
Revenues in advance
This amount received in advance is called
prepaid revenue and is to be carried forward to
_____________
the following year as a liability
______.
Rent Receivable
20X7
Dec 31 Profit and loss
“ 31 In advance c/f
$
40,000
10,000
The amount of rent earned
The amount of rent
The
balance
toyear.
be
in the
current
received but not yet 50,000
carried forward to the
earned in the current year.
next financial year.
20X7
Mar 24
Jun 27
Sep 25
Dec 26
Bank
Bank
Bank
Bank
The amount of rent
actually received in
the current year.
$
10,000
10,000
10,000
20,000
50,000
Learning Objectives
Disclosure in the balance sheet
As we mentioned before, prepaid expenses and
assets
revenues in arrears are ______.
Prepaid expenses represent the resources to be
used up in the near future.
_______
Revenues in arrears represent the monies to be
received in the near future.
_______
Therefore, both prepaid expenses and revenues in
current assets in
arrears should be shown under ____________
the balance sheet.
Disclosure in the balance sheet
As we mentioned before, accrued expenses and
liabilities
revenues in advance are ________.
Accrued expenses represent the debts to be
______
settled in the near future.
Revenues in advance represent the obligations to
provide services in the near future.
______
Therefore, both accrued expenses and revenues in
current liabilities
advance should be shown under ______________
in the balance sheet.
Disclosure in the balance sheet
Refer to Examples 1 – 4. They will be shown in
Longway Company’s balance sheet as follows:
Longway Company
Balance Sheet as at 31 December 20X7 (extract)
Current Assets
Stock
Debtors
Revenues in arrears
Prepaid expenses
Bank
Cash
$
XXX
XXX
9,000
5,000
XXX
XXX
Current Liabilities
Creditors
Revenues in advance
Accrued expenses
$
XXX
10,000
1,600
Learning Objectives
Alternative method
Using this method, instead of carrying forward the
accrued or prepaid balance in the expenses
account, we now transfer the balance to an accruals
account or a prepayments account.
The double entry for recording an accrued expense
is:
Dr Expenses account
Cr Accruals account
The double entry for recording a prepaid expense is:
Dr Prepayments account
Cr Expenses account
Alternative method
Refer to Example 1. The double entries would be:
Electricity
20X7
Apr 3
Jul 5
Oct 2
Dec 31
Bank
Bank
Bank
Accruals
$
1,500
1,800
2,000
1,600
6,900
20X7
Dec 31 Profit and loss
$
6,900
6,900
Accruals
20X7
Dec 31 Balance c/f
$
1,600
20X7
Dec 31 Electricity
$
1,600
Alternative method
Refer to Example 2. The double entries would be:
Insurance
20X7
Mar 28
Jun 25
Sep 27
Dec 29
Bank
Bank
Bank
Bank
$
5,000
5,000
5,000
10,000
25,000
20X7
Dec 31 Profit and loss
“ 31 Prepayments
$
20,000
5,000
25,000
Prepayments
20X7
Dec 31 Insurance
$
5,000
20X7
Dec 31 Balance c/f
$
5,000
Alternative method
Likewise, a revenues in arrears account and a
revenues in advance account are opened to record
all accrued revenues and prepaid revenues,
respectively.
The double entry for recording an accrued revenue
is:
Dr Revenues in arrears account
Cr Revenues account
The double entry for recording a prepaid revenue is:
Dr Revenues account
Cr Revenues in advance account
Alternative method
Refer to Example 3. The double entries would be:
Commission Receivable
20X7
Dec 31 Profit and loss
$
39,000
20X7
Apr 4
Jul 2
Oct 5
Dec 31
39,000
Bank
Bank
Bank
Revenues in
arrears
$
10,000
8,000
12,000
9,000
39,000
Revenues In Arrears
20X7
Dec 31 Commission
receivable
$
9,000
20X7
Dec 31 Balance c/f
$
9,000
Alternative method
Refer to Example 4. The double entries would be:
Rent Receivable
20X7
Dec 31 Profit and loss
“ 31 Revenues in
advance
$
40,000
10,000
20X7
Mar 24
Jun 27
Sep 25
Dec 26
Bank
Bank
Bank
Bank
50,000
$
10,000
10,000
10,000
20,000
50,000
Revenues In Advance
20X7
Dec 31 Balance c/f
$
10,000
20X7
Dec 31 Rent receivable
$
10,000