|Learning outcome | |Explain the foundations of accruals and prepayments, including the nature of the resulting change in the income statement. | |Show the entries for accruals and prepayments in the journal, ledger and final accounts. | |Prepare the final accounts from a trial balance making the required adjustment for accruals and prepayments. |
The Accrual Concepts
The accruals concept dictates that costs are recognized as they are incurred, not when money is paid. An accrual is an amount outstanding for a service provided during a particular accounting period that is still to be paid for at the end of it. It is expected that the amount due will be settled in cash in a subsequent accounting period.
THE ACCRUALS EXPENSES
The term accrued expenses refer to an expense that the business has incurred but has not yet paid yet. Normally the accountant waits till the end of period to make an adjustment before the financial statement is prepared.
Guideline for accruals expenses
1. Accrual = not paid yet, still owing, outstanding, still due 2. Income statement = the expenses paid ADD the accrual amount 3. Balance sheet = the accrued amount is shown as current liabilities
Example 1 :
Assume that rent of RM 4000 per year is payable at the end of every quarter : |Amount |Rent due |Rent paid | |RM 1000 |31 March 2012 |31 March 2012 | |RM 1000 |30 June 2012 |2 July 2012 | |RM 1000 |30 September 2012 |4 October 2012 | |RM 1000 |31 December 2012 |5 January 2013 |
Rent Expenses account
|Mar 31 |Cash |1000 |Dec 31 |Income Statement |4000 | |Jul 2 |Cash |1000 | | | | |Oct 4 |Cash |1000 | | | | |Dec 31 |Accrued c/d |1000 | | | | | | |4000 | | |4000 | | | | |Jan 1 |Accrued b/d |1000 | | | | | | | |
The closing balance is shown in the balance sheet as Current Liabilities
The accrued c/d represents the amount which is owing at the end of the financial year. The accrued amount is then debited in the expenses account as it will be included in the charge to the Income Statement as expenses, and the accrued b/d on the credit side of the account will be shown as a current liability in the balance sheet. This amount will then be carried forward to the next financial year. The charge to the Income statement, therefore reflects the total value of the services received/consumed during the accounting year (the paid and incurred expenses | The Journal...