11: ACCRUALS AND PREPAYMENTS

Chapter Summary
'Accruals:

'Prepayments:

expenses incurred by the business during the period but not yet paid for' expenses paid for before they have been used'

Accruals and prepayments

Accounting treatment

Year end adjustments

Accruals increase expenses and represent a liability: Dr Expenses (I/S) Cr Accruals (SOFP) Prepayments decrease expenses and are an asset at the year end: Dr Prepayments (SOFP) Cr Expenses (I/S)

Reversing out accruals and prepayments

Accruals and prepayments brought forward at the start of the year must be reversed Steps to answering questions: (1) Reverse opening accrual/prepayment (2) Post cash paid during the year (3) Post closing accrual/prepayment (4) Balance off the accounts

Presentation in the statement of financial position

Accruals: current liabilities Prepayments: current assets

Accrued income and deferred income 'Accrued income: 'Deferred income:

income earned but not yet invoiced' income invoiced but not yet earned'

Accounting treatment
Accrued income: Dr Receivable (SOFP) Cr Income (I/S) Deferred income: Dr Income (I/S) Cr Payable (SOFP) Opening accrued and deferred income balances must be reversed at the beginning of each year.

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