10/11/2021

TOPIC LIST
CHAPTER 9

✓ The principle behind accruals and prepayments

ACCRUALS & ✓ Accruals

PREPAYMENTS ✓ Prepayments
✓ Accounting for accruals and prepayments
✓ The accrual principle and income
✓ Accruals, prepayments, advances & arrears & the
trial balance

1 2

WHY ADJUSTING ENTRIES ARE NEEDED? FRAMEWORK FOR ADJUSTMENTS

An adjusting entry is recorded to bring an asset or liability account
✓ Prepared at end of an accounting period balance to its proper amount.
✓ ASSIGN:
+ Revenues to the period when earned ADJUSTMENTS
+ Expenses to the period when incurred
→ Bring related asset and liability Paid (or received) cash BEFORE Paid (or received) cash AFTER
accounts into correct balance expense (or revenue) recognized expense (or revenue) recognized
✓ “Accrued” means amount must be
recorded
PREPAYMENT DEFERRED ACCRUALS ACCURED
(Prepaid /Deferred INCOME (Accrued expenses) INCOME
expenses* (Prepaid income
/Unearned revenue)

*including depreciation

3 4

CASH ACCRUAL ACCRUAL / MATCHING PRINCIPLE

The accrual principle requires that we match
expenses with the revenue generated by them.

REVENUE
Revenue and expenses must be
Received Earned recognised as they are earned or
incurred and matched against one
another, not when money is
EXPENSES received or paid.

Paid Incurred

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WORKED EXAMPLE: P225 - Accrual principle

A business rents a shop for £20,000 per annum and pays the full annual rent on 1
April each year. If we calculate the profit of the business for six months to 30 June
20X7, the correct charge for rent in the statement of profit or loss is £10,000,
even though the rent paid is £20,000 in that period. Similarly, the rent charge in the
statement of profit or loss for the second six months of 20X7 is £10,000, even
though no rent is actually paid in that period.

1, Jan 1, April 31, Dec

ACCRUALS

£ 20,000

6 months
6 months

7 8

ACCRUALS
Accrued expenses (accruals): expenses which are charged In the SOFP ASSETS
against the profit for a particular period, even though they have not yet Non Current Assets Xxxx
been paid for. Current Assets
Trade receivables Xxxx
In the SOFP In the SOP/L
Cash at bank Xxxx
They must be shown as a They are shown as an
Total current assets Xxxx
current liability (because the expense (increase the expenses Total Assets Xxxxx
business entity still owes to the balance by the accrued amount CAPITAL & LIABILITIES
supplier e.g., the utility provider). of expense). Capital Xxxx
Non Current Liabilities Xxxx
THE ACCRUAL PRINCIPLE Current Liabilities
- It requires that we match expenses with the income generated by them Accruals Xxxx
- We need to carry forward expenditure paid to subsequent period Trade payables Xxxx
(a prepayment) or account for expenditure incurred before it is actually Total current liabilities Xxxx
Total Capital and Liabilities Xxxxx
paid for (an accrual)

9 10

-Horace’s reporting period: From 1, Mar to 28 Feb

ACCRUED EXPENSES - Expenses incurred before payment is made -His telephone was installed on 1, April, 20X6 and
ACCRUED EXPENSES
(Accrued liabilities) - Opposite of a prepaid expense received bill quarterly at the end of each quarter
-Calculate TELEPHONE EXPENSE for the year

+ Adjusting at the end of accounting period: 1 ended 28, Feb, 20X7?

1 DR.
To set up
To set up an accrual

Expense (Statement
an accrual of P/L)
CR. Accruals (liability on the SOFP)
£X
£X
E
X
A
1, Mar, 2006

1, April 2006
INSTALL

₤ 23.5
30, June, 2006

₤ 27.2
BILLED

-The employee has earned salaries of $210 for Monday through Wednesday. They
will not be paid until the next Friday.

₤ 33.4
28, Feb, 2007

₤ 36
Accruals M
• Work example: accrual 1 - page 10 P
• Interactive question 1 – page 11 -All the bills were paid on the final day of each 3-month period
L
E WORK EXAMPLE
Refer to Section 2, page 10

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INTERACTIVE
The ACCRUAL PRINCIPLE
ACCRUED EXPENSES QUESTION 1
means we can not ignore the
(P11)
TELEPHONE EXPENSE for Jan and Feb

1 Cleverley started in business as a paper plate and cup manufacturer on 1

January 20X2, preparing financial statements to 31 Dec 20X2. He is not
The accrual will be shown in the statement of financial registered for VAT. Electricity bills received in respect of charges for the
-The employee has earned salaries of $210 for Monday through Wednesday. They previous quarter were as follows:
position of the will
business as until
not be paid at 28, February
the next Friday. 20X7, as a
E 20X2 20X3
X current liability. £ £
The journal: 31 January – 491.52
A 30 April 279.47 400.93
M Dr. Telephone expense ₤ 24 31 July 663.80 700.94
P Cr. Accrual (liability) ₤ 24 31 October 117.28 620.00
L Requirement
What is the electricity expense for the year ended 31 December 20X2?
E Prepare a journal entry to record the accrual as at 31 December 20X2.

13 14

1, Jan 31, Dec In the Statement of profit or loss

30, 31, 31, 31,

April July Oct Jan ELECTRICITY
₤ 279.47 ₤ 663.80 ₤ 117.28 ₤ 491.52 Reversed ACCRUAL

2 months –
not yet paid EXPENSE
CASH
PAID
Total expenses for 20X2 = 1,060.55 + 491.52 * 2/3 = 1,388.23

Dr. Electricity account 327.68 Closing ACCRUAL

Cr. ACCRUALS 327.68

15 16

Section 4.1. PAGE 13, FOR REVERSING ACCRUAL INTERACTIVE

QUESTION 2
ELECTRICITY (P14)

Reversing 327.68 Snuffer - a business dealing in pest control. Its owner, Robert Dent,
employs a team of 8 people who were paid £12,000 per annum each in
the year to 31 Dec 20X5.
31, Jan 491.52 -At the start of 20X6 he raised salaries by 10% to £13,200 per annum
30, April 400.93 each.
P/L account 2,387.87 - On 1 July 20X6, he hired a trainee at a salary of £8,400 per annum.
31, July 700.94
He pays his work force on the first working day of every month, one
31, Oct 620.00
month in arrears, so that his employees receive their salary for January
Closing ACCRUAL 502.16 on the first working day in February, etc.
753,24/3*2=

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Requirements
1, Jan 31, Dec
(a) Calculate the cost of salaries charged in Snuffer's statement of profit or loss
for the year ended 31 December 20X6. 1, July
(b) Calculate the amount actually paid in salaries during the year (ie, the Hired a trainee
amount of cash received by the work force). ₤ 8,400
(c) State the amount of the accrual for salaries which will appear in Snuffer's
statement of financial position as at 31 December 20X6.
Jan, 20X6: Paid Salary for Dec, 20X5 = 1,000 * 8 = 8,000
1, Jan 31, Dec

1, July 20X6: Paid Salary for 11 months, 20X6 = 1,100 * 8 *11 = 96,800
Hired a trainee
₤ 8,400 20X6: Paid Salary for 5 months
= 8.400/12 * 5 = 3,500
a) SALARY EXPENSE = 13,200 * 8 + 8,400/2 = 109,800 B) SALARY PAID = 8,000 + 96,800 + 3,500 = 108,300
C) ACCRUED SALARY = 1,100 *8 + 700 = 9,500

19 20

Quick accrual Formula

Expense of the year = opening accrual

+ cash received
– closing accural
SUMMARY PREPAYMENTS
Effect on Effect on Effect on
Income/expenses profit assets/liabilities
Accrued Increase expenses Decrease profit Increases
expenses liabilities

21 22

ABC LTD pays advance rent to its landowner of ₤12,000

PREPAYMENT
Deferred Expenses (Prepaid Expenses) PREPAYMENT on 30th, Sept 2010 in respect of office rent for 1 year.
(Prepaid expense)
ABC LTD has an accounting year end of 31st Dec 2010.
• Resources paid for prior to receiving the actual benefits
• Prepaid expenses are assets
2 a/ On 30th, Sept 2010:

2
• Adjusting entry records amount used as an expense
DR Rent 12,000

$$ CR Cash 12,000
+ Prepaid for insurance, renting, supplies:
Debit Rent Expense (Income Statement) 10,000
Dr. Rent/insurance/supplies $$$ E Credit
b/Prepaid
On 31stRent 10,000
, Dec 2010: Adjustment
Cr. Cash $$$ X DR Prepayment 9,000
A CR Rent 9,000
+ Adjusting at the end of accounting period: M
Dr. PREPAYMENTS $$$ P c/ Next year, 2011, reversed entry:
Cr. Rent/insurance/supplies $$$ L DR Rent 9,000
E CR Prepayment 9,000

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PREPAYMENTS (Prepaid of expenses) In the SOFP

are expenses which have already been paid but Assets

relate to a future accounting period Non Current Assets Xxxx

Current Assets
In the SOFP In the SOP/L Trade receivables Xxxx
They are shown as a current Cash at bank Xxxx
We must deduct the
Prepayment Xxxx
asset (because e.g., the prepayment from the
Total current assets Xxxx
landlord provider owes the relevant expenses figure. Total Assets Xxxxx
firm what it has been Capital and Liabilities
prepaid). Capital Xxxx
Non Current Liabilities Xxxx
Current Liabilities
Expenses which have been paid in one reporting period, but are
Accruals Xxxx
not charged against profit until a later period, because they relate to Trade payables Xxxx

that later period Total current liabilities Xxxx

Total Capital and Liabilities Xxxxx

25 26

WORKED EXAMPLE: PREPAYMENT 1

In the Statement of profit or loss
A business opens on 1 January 2016 in a shop which is
on a 20 year lease. The rent is £ 20,000 per year and is RENT account
payable quarterly in advance as follows:
01.01 Cash 5,000
31.03 Cash 5,000 20,000 P &L 31.12
1, Jan 31, Mar 30, June 30, Sept 31, Dec
30.6 Cash 5,000
30.9 Cash 5,000
31.12 Cash 5,000
£ 5,000 £ 5,000 £ 5,000 £ 5,000 £ 5,000
5,000 Prepayment 31.12

What will the rental charge be for

the year ended 31 Dec, 2016?
Refer to Section 3, page 11

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THE DOUBLE ENTRY OF PREPAYMENT WHAT HAPPENS IN THE FOLLOWING PERIOD?

The double entry of prepayment will be reversed in the following period:

1. Paying the rent expense: In 2017, the £ 5,000 paid on 31 st, Dec 2016 is considered as a rent
Dr. Rent account £ 25,000 expense relating to 2017, therefore:

Cr. Cash £ 25,000

Dr. Rent account £ 5,000
Cr. Prepayments (asset) £ 5,000
2. Recognising the prepaid expense:
Dr. Prepayments (asset) £ 5,000
Cr. Rent account £ 5,000

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Quick expense prepayment formula In the Statement of profit or loss

EXPENSE = OPENING PREPAYMENT RENT account

+ CASH PAID
Reversed prepayment
– CLOSING PREPAYMENT
CASH PAID EXPENSE
Applying the above formula to previous example:

Rent expense in 2017 = prepayment balance at the beginning of 2017

+ cash paid for rent in 2017

- prepayment balance at the end of 2017 (if existed)
Closing prepayment

31 32

Section 4.1.2, PAGE 14 FOR REVERSING PREPAYMENT LET’S PRACTICE

RENT ✓WORKED EXAMPLE 2: Prepayment – page 15

Reversing 5,000 ✓WORKED EXAMPLE 3: Prepayment – page 17
✓WORKED EXAMPLE 3: Accrual 3 – page 16
4 payments 20,000 P/L account 20,000

Closing prepayment 5,000

Payment since 31/3

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WORKED EXAMPLE: PREPAYMENT 2

The Square Wheels Garage pays fire insurance annually in advance on
WORKED EXAMPLE: 1 June each year, year ended 28 February.
REQUIREMENT:

PREPAYMENT 2 (p15) calculate the insurance charge to the statement of P/L for the year ended
28 Feb 20X8?
(Insurance paid 1,June 20X6 is 600 and 20X7 is 700)

1, Mar, 20X7 28, Feb, 20X8

1, June, X7
Annual 600
Annual 700

Refer to Section 4, page 15

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In the Statement of profit or loss

INSURANCE
1/3/X7: WORKED EXAMPLE:
Reverse prepayment 150 675 P &L 31.12
(3 months)

1, June, X7 Cash paid 700

PREPAYMENT 3 (p17)
175 Prepayment 31/12/X8
(3 months)

37 38

WORKED EXAMPLE: PREPAYMENT 3 In the Statement of profit or loss

Terry Trunk commences business on 1 Sept 20X5. He decides to join
his local trade association, annual membership subscription is £180,
payable in advance. He paid this amount on 1 Sept 20X5. In the
SUBSRIPTION
following year he expects the subscription to rise by £12. Terry’s 1/9/X5:
reporting period should end on 30 June each year. Cash 180 150 P &L 30/6/X6

Annual 180
1, July, 30, June
20X5 30 Prepayment 30/06/X6
20X6 (2 months)
1, Sept,
20X5
10 months

Refer to Section 4, page 233

39 40

NEXT YEAR
SUBSCRIPTION
1/7/X6: WORKED EXAMPLE:
Reverse prepayment 30 190 P &L 30/6/X7
(2 months)

1/9/X6 Cash paid 192

ACCRUAL 3, p16

32 Prepayment 30/6/X7
(2 months)

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WORKED EXAMPLE: ACCRUAL 3, p16 In the Statement of profit or loss

✓ Mark opens a shop on 1 May 20X6 to sell camping equipment.
✓ The shop rent is £12,000 per annum, payable quarterly in arrears RENT
(with the first payment on 31 July 20X6).
31/7/X6:
✓ His reporting period ends on 31 December each year.
Cash 3,000
8,000 P &L 31/12/X6
31/10/X6:
Annual 12,000 Cash 3,000
1, Jan
31, Dec
20X6 Accruals 31/12/X6 2,000
20X6
(2 months)
31, July, 31, Oct,
20X6 20X6

2 months
Refer to Section 4, page 233

43 44

NEXT YEAR PAID 1: £30,000

RENT
20X7: 2,000 Reversed accrual
31/1 Cash 3,000
30/4 Cash 3,000
31/7 Cash
31/10 Cash
3,000
3,000 12,000 P/L account 31/12 EXPENSES
31/12 Accruals 2,000 £ 20,000
2,000 Accruals 31/12/20X7
(2 months)
PAID 2: £ 12,000

45 46

DEFERRED INCOME Deferred Revenue (Unearned Revenue)

• Deferred income
• Cash is collected before revenue is earned been received in ad
the reporting perio
• Also called deferred revenue

3
forward and treate
following reporting
+ To record cash received before service is provided
DEFERRED INCOME Dr. Cash $$$ • Accounting for de
DEBIT Revenue or o
Cr. Revenues or other income $$$ profit or loss)

+ To record earned portion of unearned revenue statement of financ

Dr. Revenue or other income $$$

Cr. Deferred income $$$

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ABC LTD pays advance rent to its landowner of PREPAID INCOME (Prepayment of income/ Unearned revenue):
DEFERRED INCOME ₤ 12,000 on 30th, Sept 2010 in respect of office is revenue received in advance but which is not earned yet.
rent for 1 year.
Accounting year end of 31st Dec 2010. It is known that income must be recorded in the accounting period in
3 a/ On 30th,
Dr. Cash
Sept 2010: the following accounting entry:
12,000
which it is earned.
Therefore:
Cr. Rent revenue 12,000
In the Statement of P/L In the SOFP
E b/ On 31st , Dec 2010: Adjustment
prepaid income must not be it must be recognised as
X Dr. Rent revenue 9,000
shown as income (subtracted) liability in the accounting
A Cr. Prepaid/Deferred revenue 9,000
period in which it is
M
c/ REVERSED entry will be recorded in 2011 received.
P
L Dr. Deferred revenue 9,000
E Cr. Rent revenue 9,000

49 50

In the SOFP Assets

Non Current Assets Xxxx
Current Assets
Trade receivables Xxxx WORKED EXAMPLE:
Cash at bank Xxxx
Prepaid expense
Total current assets
Xxxx
Xxxx PAGE 236 – Accrued
Total Assets Xxxxx
Capital and Liabilities
Capital Xxxx income & Deferred income
Non Current Liabilities Xxxx
Current Liabilities
Accruals Xxxx
Prepaid Income Xxxx
Total current liabilities Xxxx
Total Capital and Liabilities Xxxxx

51 52

Deferred and accrued income WE SHOULD:

WORKED
EXAMPLE PAGE 20 SOLUTION FOR WORK EXAMPLE p236
(a1) During 20X4: deposits from customers
Sunrise Carpets sells floor coverings to the public. At the end of
Dr. Cash …………
its 12-month reporting period, 31 Dec20X4, it has recorded as
Cr. Sales …………
sales £1,200 received from customers as deposits on carpets
which are not due to be invoiced until Feb 20X5. (a2) At 31st Dec, 20X4: adjustments
In Jan 20X5 it records a £500 refund from one of its main Dr. Sales 1,200
suppliers as a result of exceeding the agreed level of custom Cr. Deferred income (liability) 1,200
during 20X4.
We expect:
Requirements: Prepare journals:
(a3) REVERSAL at 1st Jan, 20X5: adjustments
(a) Recording these transactions in the ledger accounts for the reporting
Dr. Deferred income 1,200
period ended 31 December 20X4.
Cr. Sales 1,200
(b) Recording these transactions in the ledger accounts for the reporting
period ended 31 December 20X5.

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IN TEXT BOOK:
Quick income prepayment Formula
SOLUTION IN TEXT BOOK- P236 But in text book
(a4) REVERSAL at 1st Jan, 20X5: adjustments Income of the year = opening income prepayment
Dr. Deferred income 1,200
+ cash received
Cr. TRADE RECEIVABLES 1,200
– closing income prepayment
Explain:
SUMMARY
(a5) Because at Feb, 20X5:
Because: Effect on Effect on Effect on
Income/expenses profit assets/liabilities
When we invoice:
Prepayments Reduces expenses Increases profit Increases assets
Dr. TRADE RECEIVABLES 1,200
of expense
Cr. Sales 1,200
Prepayments Reduces income Reduces profit Increases
Solution in text book above (a4) + (a5) = the same (a3) Of income liabilities

55 56

Accrued Revenues (Accrued Assets)

ACCRUED INCOME
• Revenue earned before cash is received
• Results in a receivable

ACCRUED INCOME
4 The accrual principle also applies to income.
• Accrued income arises when receipt of income (such as rent
or subscription) is in arrears at the year end.
• Accounting for accrued income
DR Accrued income (asset in the SOFP- Receivables)
CR Other income (statement of P/L)

57 58

+ On Dec 12, 2009. NHL agrees to render

ACCRUED REVENUES
consulting services under a 30-day fixed fee
contract for £ 2,700 (£ 90 per day) WORKED EXAMPLE:
4 + All services are to be completed by Jan 10,
2010, when the client will pay in full.
PAGE 20 – Accrued income
F. What is the Dec 31 adjusting entry? (20 days)
E
X Dr. Accrued income (Receivables) 1,800
& Deferred income
A
Cr. Consulting Revenue 1,800
M
P To accrue revenue (20-days @ $90 per day)
L
E

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Deferred and accrued income WE SHOULD:

WORKED
EXAMPLE PAGE 20 SOLUTION FOR WORK EXAMPLE p20

Sunrise Carpets sells floor coverings to the public. At the end of (b1) During 20X4: purchases
its 12-month reporting period, 31 Dec20X4, it has recorded as
Dr. Purchases ………… We only be familiar with
sales £1,200 received from customers as deposits on carpets Dr. Accrued income
Cr. Cash …………
which are not due to be invoiced until Feb 20X5.
Cr. Revenue……….
In Jan 20X5 it records a £500 refund from one of its main
(b2) At 31st Dec, 20X4: adjustments
suppliers as a result of exceeding the agreed level of custom
Dr. Accrued income 500
during 20X4.
Cr. Purchases 500
Requirements: Prepare journals:
(a) Recording these transactions in the ledger accounts for the reporting
(b3) REVERSAL at 1st Jan, 20X5: adjustments
We expect:
period ended 31 December 20X4.
Dr. Purchases 500
(b) Recording these transactions in the ledger accounts for the reporting
Cr. Accrued income 500
period ended 31 December 20X5.

61 62

IN TEXT BOOK:
But in text book
SOLUTION IN TEXT BOOK- p20

(b4) REVERSAL at 1st Jan, 20X5: adjustments

INTERACTIVE
Dr. TRADE PAYABLES
Cr. Accrued income
500
500
QUESTION 6:
Explain:
(b5) Because in 20X5: negative invoice received
Because: ACCRUED INCOME
When we receive negative invoice:
Dr. TRADE PAYABLES 500
Cr. Purchases 500
Solution in text book above (b3) + (b5) = the same (b4)

63 64

Refer to Section 4, page 21

INTERACTIVE
QUESTION 6 SUBSRIPTION
(P21) 1/7/X6 1/7/X6
Accrued income 4,840 2,380 Deferred income
The Drones Club: reporting period ended 30 June.
✓ Its annual subscription for the year ended 30 June 20X7 was £100, 30/6/X7 23,620 Cash received
and this rose to £120 per annum for the year to 30 June 20X8. P/L account (200*100) = 20,000
✓ As at 1 July 20X6 the Club's members had paid £2,380 in advance, 30/6/X7 Deferred income ????? 400 Accrued income 30/6/X7
and were £4,840 in arrears. The Club only has 200 members, and
there are no irrecoverable amounts. 26,400 26,400
✓ It received £23,620 in respect of subscriptions in the year to 30 June
400 Accrued income 30/6/X7 1,560 Deferred income 30/6/X7
20X7, and four members are known to be in arrears at 30 June 20X7.
✓ Note: from 1 July 20X6, no longer accept any part payment
Requirement
How many members have paid their subscriptions for the reporting Number of….. = 1.560/120=13 members
period ended 30 June 20X8 in advance?

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✓ Reversing accrual of expense set up in previous period

DR. Accrual (opening credit balance on liability account)
CR. Expense (new period)
5. REVERSING ACCURALS
✓ Reversing prepayment of expense set up in previous period
& PREPAYMENT DR. Expense (new period)
CR. Prepayment (opening debit balance on asset account)

67 68

The Batley Print Shop, which is not registered for VAT,

rents a photocopying machine. It makes a quarterly

INTERACTIVE INTERACTIVE
payment as follows:
(a) Three months rental in advance
(b) A charge of 2 pence per copy made during the quarter
QUESTION 3 just ended
QUESTION 3: The rental agreement began on 1 August 20X4. The first six quarterly bills were as

p15 – Prepayments &

follows.
Bills dated Rental Cost of Total
copies taken
£ £ £

Accurals 1 August 20X4

1 November 20X4
2,100
2,100
0
1,500
2,100
3,600
1 February 20X5 2,100 1,400 3,500
1 May 20X5 2,100 1,800 3,900
1 August 20X5 2,700 1,650 4,350
1 November 20X5 2,700 1,950 4,650
The bills are paid promptly, as soon as they are received.

69 70

The Batley Print Shop, which is not registered for VAT,

rents a photocopying machine. It makes a quarterly
payment as follows: 1, Sept
(a) Three months rental in advance 20X3 31, Aug
INTERACTIVE (b) A charge of 2 pence per copy made during the quarter 20X4
QUESTION 3 just ended 1, Aug,
20X4
Requirements
1 month
(a) Calculate the charge for photocopying expenses for the year to 31
August 20X4 and the amount of prepayments and/or accrued charges a1) Photocopying expenses for the year to 31 Aug 20X4
as at that date. 1/8/20X4 paid in advance 2,100 ➔ Expense for 1 month = 700
(b) Calculate the charge for photocopying expenses for the following Prepayment for 2 months = 1,400
year to 31 August 20X5, and the amount of prepayments and/or
a2) Cost of copies taken: 1,500 for 3 months ended 31/10/20X4
accrued charges as at that date.
(received bill in 1, Nov, 20X4)
Refer to Section 4, page 15 ➔ 31, Aug, accrued expense = 1,500/3 = 500

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In the Statement of profit or loss

PHOTOCOPY-rent
PHOTOCOPY 01/9/X4 Prepayment 1,400
01/11/X4 Cash 2,100 8,600 P &L 31.12
01/9/X4 Prepayment 1,400 500 Accrued Ex 1/9/X4
01/02/X5 Cash 2,100
01/11/X4 Cash 2,100 + 1,500 1,800 Prepayment 31.8.X5
01/05/X5 Cash 2,100
01/02/X5 Cash 2,100+ 1,400
15,100 P &L 31.12 01/08/X5 Cash 2,700
01/05/X5 Cash 2,100+ 1,800
01/08/X5 Cash 2,700+ 1,650 10,400 10,400

31/8/X5 Accruals 1,950/3=650 1,800 Prepayment 31.8.X5 31/8/X5 Prepayment 1,800

17,400 17,400
31/8/X5 Prepayment 1,800 31/8/X5 Accruals = 650

73 74

In the Statement of profit or loss ACCRUALS, PREPAYMENT, ADVANCES & ARREARS

on the ETB
PHOTOCOPY- copies
✓ Calculate the amounts of the accrued and prepaid expenses, and
500 Accrued Ex 1/9/X4
the deferred or accrued income, as usual.
01/11/X4 Cash 1,500
✓ Prepare the period-end journals as usual.
01/02/X5 Cash 1,400
6,500 P &L 31.12 ✓ Enter these journals in the adjustments columns of the ETB,
01/05/X5 Cash 1,800
opening up lines in the statement of financial position column for
01/08/X5 Cash 1,650
accruals, prepayments, accrued income and deferred income as
31/8/X5 Accruals 1,950/3=650 necessary.
✓ Include these adjustments in the ETB cross-cast to prepare the
financial statements.
7,000 7,000
✓ Enter the closing journals in the ledger accounts as usual.
31/8/X5 Accruals = 650 ✓ Prepare and enter the opening journals.

75 76

INTERACTIVE QUESTION 4:
Statement of P/L and SOFP
The Umbrella Shop has the following trial balance as at 30 September
20X8:
£ £
Sales - 156,000
INTERACTIVE Purchases
Non-current assets
65,000
200,000
-
-
Inventory at 1.10.X7 10,000 -
QUESTION 4: Cash at bank
Trade receivables
12,000
54,000
-
-
Trade payables 40,000 -
p18– Financial statements Distribution costs
Petty cash
10,000
2,000
-
-
Administrative expenses 15,000 -
Finance costs 5,000 -
Delivery inwards 1,000 -
Delivery outwards 2,000 -
Capital account at 1.10.X7 - 180,000
376,000 376,000

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The following information is available: (1) WORKING 1:

(a) Closing inventory at 30.9.X8 is £13,000, after writing off damaged Closing inventory
goods of £2,000. As the figure of £13,000 is after writing off damaged goods
(b) Included in administrative expenses is machinery rental of £6,000 COGS = Opening + Purchases + Delivery inwards – Closing
covering the year to 31 December 20X8. = 10,000 + 65,000 + 1,000 – 13,000 = 63,000
(c) A late invoice for £12,000 covering rent for the year ended 30 June
20X9 has not been included in the trial balance. (2) WORKING 2: Administrative expenses
Per trial balance 15,000
Requirement
Add accrual (W3) 3,000
Prepare a Statement of P/L or SOFP for the year ended 30 Sept 20X8. Less prepayment (W4) (1,500)
16,500

79 80

The Umbrella Shop

Statement of profit or loss for the year ended 30 September
(3) WORKING 3: Accruals 20X8
£ £
Rent for year to 30 June 20X9 12,000 Sales 156,000
Opening inventory 10,000
Accrual for period to 30 September 20X8 3,000
Purchases 65,000
(3/12 * £12,000) Delivery inwards 1,000
Closing inventory (W1) (13,000)
Cost of sales (63,000)
(4) WORKING 4: Prepayments Gross profit 93,000
Distribution costs (10,000 + 2,000) 12,000
Machinery rental for the year to 31 Dec20X8 6,000 Administrative expenses (W2) 16,500
Prepayment for period 1 Oct to 31 Dec20X8 1,500 Finance costs 5,000
(33,500)
(3/12 *£ 6,000) Net profit for the year 59,500

81 82

The Umbrella Shop - SOFP as at 30 September 20X8

ASSETS
Non-current assets 200,000
Current assets
Inventory (W1) 13,000
WORKED EXAMPLE:
Trade receivables 54,000
Prepayments (W4)
Cash at bank and in hand (12,000 + 2,000)
1,500
14,000 PAGE 22 – Accruals &
82,500
Total assets 282,500
CAPITAL AND LIABILITIES
Owner's capital
Prepayments and Trial
Balance brought forward 180,000
Profit for the year 59,500
239,500
balance
Current liabilities
Trade payables 40,000
Accruals (W3) 3,000
43,000
Total capital and liabilities 282,500

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Worked example: p22

She needs to take account of the following matters:
Jezebel makes and sells clothing to order. Her reporting period is the 12 months
ended 31 December. She has extracted the following trial balance as at 31 (a) Her quarterly power bills are £822. The last bill she paid was in
December 20X1 respect of the quarter ending 31 October 20X1.
Debit Credit (b) Her annual rent bill of £2,970 was paid on 1 May 20X1 in respect
£ £ of the year to 30 April 20X2.
Cash at bank 6,541
(c) Sales include £350 received from cash customers in December in
Opening capital 15,000
Loan 8,000 respect of items of clothing that Jezebel will complete in January
Non-current assets 45,000 20X2.
Trade payables 16,758 (d) A royalty of £58 is due from a fashion magazine which used
Expenses 10,877 Jezebel's products in a fashion shoot. Jezebel wishes to account for
Purchases 62,975
this as other/accrued income rather than trade receivables.
Sales 157,632
Other income 0
Trade receivables 22,854 We need to complete Jezebel's ETB to calculate her net profit for the
Drawings 49,143 reporting period.
197, 390 197, 390

85 86

THE EXTENDED TRIAL BALANCE

Ledger balance Initial trial balance Adjustments Final trial balance
£ £ £ £ £ £
Cash at bank 6,541 6,541
Opening capital 15,000 15,000
Loan 8,000 8,000

THE END…
Non-current assets 45,000 45,000
Trade payables 16,758 16,758
Expenses 10,877 (a) 548 (b) 990 10,435
Purchases 62,975 62,975
Sales 157,632 (c) 350 157,282
Other income (d) 58 58
Trade receivables 22,854 22,854
Drawings 49,143 49,143
Accruals (a) 548 548
Prepayments (b) 990 990
Accruals income (d) 58 58
Deferred income (c) 350 350
TOTAL 197,390 197,390 1,946 1,946 197,996 197,996

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