Year 12 Accounting

Revision Lesson
Accruals and Prepayments
of Expenses
Chapter 12 in the
textbook
What’s this topic about?
We have already prepared a set of financial statements:
Income Statement
Statement of Financial Position

We now look at a number of situations where

adjustments to the financial statements are needed

Two of these adjustments are

Accruals and Prepayments of expenses.
How are these adjustments
examined?
Questions can be asked in one of two ways:
1. You might be asked to prepare a T Account for an
expense
2. You might be given a set of adjustments to
incorporate into an Income Statement or a SOFP
Accruals of expenses
Accruals of expenses
What is an accrual of an expense?
An accrual is an amount that has been incurred during an
accounting period which is unpaid at the end of that
accounting period

Examples:
1. The business has used water in their offices and shop for
the whole financial year, but hasn’t received the bill yet
2. Shop workers have worked all year, but haven’t been
paid yet for the work they did in the final month of the
financial year
In the financial statements…
The expense has been incurred [this means that
(using the previous examples) the water has been
used and the workers have provided their labour]
so the accruals (or matching) concept tells us that we
should show the expense in the financial statements
that cover that period.

This means we MATCH the expense in the income

statement to the period of time when the benefit
was received
What does this mean?
In the financial statements…
In the Income Statement, we ADD the amount of the
accrual to the expense that has already been
recorded

The accrual is the amount OWED, therefore it is

shown as a current liability in the SOFP

Let’s look at an example…

Example of an accrual in the
financial statements
The trial balance shows that £18,000 of electricity
bills have been paid for the first 9 months of the
financial year. The bill for the final 3 months,
expected to be £6,500, has not yet been received.

How will this be reflected in the financial

statements?
Example of an accrual in the
financial statements
The trial balance shows that £18,000 of electricity bills
have been paid for the first 9 months of the financial
year. The bill for the final 3 months, expected to be
£6,500 has not yet been received.

Income Statement:
The electricity expense will be shown as: £18,000 +
£6,500 = £24,500
The SOFP:
The accrual of £6,500 will be shown as a current liability
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

Bills paid for

this period of
time
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

Bills paid for

this period of Bill
time expected
here
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

Bills paid for The bill for this period of time is expected
this period of sometime in the next financial year Bill
time expected
here
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

Bills paid for The bill for this period of time is expected
this period of sometime in the next financial year Bill
time expected
here
£1,000 £600 that covers a 6 month period
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

2 months 4 months

Bills paid for The bill for this period of time is expected
this period of sometime in the next financial year Bill
time expected
here
£1,000 £600 that covers a 6 month period
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

2 months 4 months

Bills paid for The bill for this period of time is expected
this period of sometime in the next financial year Bill
time expected
here
£1,000 £600 that covers a 6 month period
Calculating Accruals
Often, in exam questions, the expected future
payment covers a period of time that is partly before
the end of the financial year, and partly after the end
of the financial year:
End of the financial year

2 months 4 months

Bills paid for The bill for this period of time is expected
this period of sometime in the next financial year Bill
time expected
Accrual =
2/6 x £600 = here
£1,000 £600 that covers a 6 month period
£200
What is the impact of this in the financial
statements?

In the Income Statement:

Expense =

In the SOFP:
What is the impact of this in the financial
statements?

In the Income Statement:

Expense = £1,000 + £200 = £1,200

In the SOFP:
Accrual = “Other Payables” = Current Liability = £200
Preparing the T Account
Sometimes exam questions ask you to prepare a T
Account where the expense has accruals at the start
and end of the year.

Here’s an example:
Accrual at the start of the financial year £1,060
Bills paid during the year (£1,060 related to last year) £2,830
Accrual at the end of the financial year £950
The financial year ran from 1st January 2019 to 31st December
2019
 Expense

---------- ---------

--------- ---------

Remember that Accruals are a

Current Liability, so the Balance
b/f (the accrual) will always be
shown on the CREDIT side of the
account
 Accrual at the start of
Expense the year
1st Jan ’19 Balance b/f 1,060

---------- ---------

--------- ---------

Remember that Accruals are a

Current Liability, so the Balance
b/f (the accrual) will always be
shown on the CREDIT side of the
account
 Always put in the full
amount paid during the year:
disregard the information
about the £1,060 that
related to last year)
Accrual at the start of
Expense the year
2019 Bank 2,830 1st Jan ’19 Balance b/f 1,060

---------- ---------

--------- ---------

Remember that Accruals are a

Current Liability, so the Balance
b/f (the accrual) will always be
shown on the CREDIT side of the
account
 Always put in the full
amount paid during the year:
disregard the information
about the £1,060 that
related to last year)
Accrual at the start of
Expense the year
2019 Bank 2,830 1st Jan ’19 Balance b/f 1,060
31st Dec ‘19 Balance c/f 950

---------- ---------

--------- ---------
1st Jan ’20 Balance b/f 950

Remember that Accruals are a Accrual at the end of

Current Liability, so the Balance the year
b/f (the accrual) will always be
shown on the CREDIT side of the
account
 Always put in the full
amount paid during the year:
disregard the information
about the £1,060 that
related to last year)
Accrual at the start of
Expense the year
2019 Bank 2,830 1st Jan ’19 Balance b/f 1,060
31st Dec ‘19 Balance c/f 950 31st Dec ’19 Income 2,720
Statement
---------- ---------
3,780 3,780
--------- ---------
1st Jan ’20 Balance b/f 950

Remember that Accruals are a Accrual at the end of

Current Liability, so the Balance the year
b/f (the accrual) will always be
shown on the CREDIT side of the
account