ACCRUALS AND PREPAYMENTS

ACCRUALS/ DEFINITION ACCOUNTING

PREPAYMENTS TREATMENT
ACCRUED EXPENSES THESE ARE EXPENSES IT IS ADDED IN RELATED
INCURRED BUT NOT YET EXPENSE IN PROFIT AND
PAID. FOR E.G. ACCRUED LOSS ACCOUNT.
SALARIES, ACCRUED IT IS SHOWN AS A
RENT ETC. CURRENT LIABILTY IN
BALANCE SHEET.
ACCRUED INCOMES THESE ARE INCOMES IT IS ADDED IN RELATED
INCURRED BUT NOT YET INCOME IN PROFIT AND
RECEIVED.FOR E.G. LOSS ACCOUNT.
ACCRUED INVEMTMENT IT IS SHOWN AS A
INCOME, ACCRUED CURRENT ASSET IN
COMMISSION ETC. BALANCE SHEET
PREPAID EXPENSES THESE ARE EXPENSES IT IS SUBTRACTED FROM
PAID IN ADVANCEFOR THE RELATED EXPENSE
E.G. PREPAID IN PROFIT AND LOSS
INSURANCE,PREPAID ACCOUNT.
ADVERTISEMENT COSTS IT IS SHOWN AS A
ETC. CURRENT ASSET IN
BALANCE SHEET
PREPAID INCOMES THESE ARE INCOMES IT IS SUBTRACTED FROM
RECEIVED IN THE RELATED EXPENSE
ADVANCE.FOR E.G. IN PROFIT AND LOSS
PREPAID RENT, PREPAID ACCOUNT.
INSURANCE ETC. IT IS SHOWN AS A
CURRENT LIABILTY IN
BALANCE SHEET
EXAMPLE 1

The following is the extract of trail balance of Lamb Limited for the year ended 31-
12-2018

Debit ($) Credit ($)

Salaries 500
Insurance 200
Investment income 400
Rent income 100
Salaries of $200 are accrued. Insurance of $40 is prepaid. Investment income
receivable (accrued) is $50. Rent prepaid $10

Show the profit and loss and balance sheet extracts for the year 31-12-2018

Answer

Income statement
($)
Salaries expense ( 500 + 200) 700
Insurance expense (200 – 40) 160
Investment income (400 + 50) 450
Rent income (100 – 10) 90

Balance sheet
($)
Current assets:
Prepaid insurance expense 40
Accrued investment income 50
Current liabilities:
Accrued Salaries expense 200
Prepaid rental income 10
EXAMPLE 2

The following is the extract of trail balance of Gooch Limited for the year ended
31-12-2011

Debit ($) Credit ($)

Electricity 5,000
Insurance 7,000
Rental income 1,000

Paid electricity $1,500 on 31-1-2012 for the previous quarter. Insurance cost paid
on 1-10-2011 covering period of 12 months $1,200. Prepaid rent income $200.
Show the profit and loss and balance sheet extracts for the year 31-12-2011

Answer

Accrued electricity = 1,500 x 2/3 = 1,000

Prepaid insurance = 1,200/12 = 100 x 9 = 900

Income statement
($)
Electricity expense (5,000 + 1,000) 6,000
Insurance expense (7,000 – 900) 6,100
Rent income (1,000 – 200) 800

Balance sheet
($)
Current assets:
Prepaid insurance expense 900
Current liabilities:
Electricity payable 1,000
Prepaid Rent income 200
EXAMPLE 3 (ASSIGNMENT)

The following is the extract of trail balance of Gooch Limited for the year ended
31-12-2011

Debit ($) Credit ($)

Electricity 10,000
Insurance 5,000
Rental income 500

Paid electricity $600 on 28-2-2012 for the previous quarter. Insurance cost paid
on 1-6-2011 covering period of 9 months $ 1,800. Accrued rent income $100.
Show the profit and loss and balance sheet extracts for the year 31-12-2011

Answer

Accrued electricity = 600 x 1/3 = 200

Prepaid insurance = 1,800/9= 200 x 3 = 600

Income statement
($)
Electricity expense (10,000 + 200) 10,200
Insurance expense (5,000 – 600) 4,400
Rent income (500 + 100) 600

Balance sheet
($)
Current assets:
Prepaid insurance expense 600
Accrued rent income 100
Current liabilities:
Electricity payable 200
EXAMPLE 4 (ASSIGNMENT)

Answer

Bad debts & Provisions

INCOME STATEMENT (£) BALANCE SHEET (£)

OLD BAD DEBTS 0 DEBTORS( IN TRAIL 167,000
(IN TB) BALANCE)
+NEW BAD DEBTS 7,000 - NEW BAD DEBTS (7,000)
( IN ADJ)
+ NEW PROVISION (IN 8,000 - NEW PROVISION (8,000)
ADJ)
- OLD PROVISION (4,600)
(IN TB)
TOTAL DEBTOR EXPENSES 10,400 CLOSING DEBTORS 152,000

NEW PROVISION = DEBTORS (IN TRAIL) - NEW BAD DEBTS = NET DEBTORS X %age
167,000– 7,000 = 160,000 X 5 % = 8,000
Accruals & Prepayments

Accrued electricity = 4,500/3 =1,500 x 1 = 1,500

Prepaid rent = 9,000/6 = 1,500 x 4 = 6,000

Income statement

(£)
Electricity expense (10,000 + 1,500) 11,500
Rent expense (38,000 – 6,000) 32,000

Balance sheet

(£)
Current assets:
Prepaid rent expense 6,000
Current liabilities:
Electricity payable 1,500