Assume the Position

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ACT 1100Introduction to Accounting Summer Course Lecturer: Troy J. Wishart

Our Confession ACT 1100 Is EASY POP! Because, My Belief Determines my Destination

Lecture Notes 4 Accruals and Prepayments

Accruals & Prepayments Introduction • Accrual Concept - Revenue and Expenses are accrued, that is recognizedas they are earned or incurred (and not as money is received or paid),…

Accruals & Prepayments Introduction • ThereforeExpenses are charged to the period in which they are incurred, that is when the benefit would have been obtained by business, whether cash is paid or not.

Accruals & Prepayments Introduction • Accruals and prepayments are like creditors and debtors, except that there is no invoice awaiting payment.

Accruals & Prepayments Introduction • Common examples of prepayments are • Rent, • Rates, • Insurance And • Road Tax • paid for in advance,

Accruals & Prepayments Introduction • Common examples of accruals are • Electricity, • Gas and • Telephone • Which are paid in arrears

Accruals & Prepayments Introduction • Accruals are liabilities and usually have a credit balance • Prepayments are Assets and usually have a debit balance

Accruals & Prepayments Introduction • There can be: • Accrued Expense • Prepaid Expense • Accrued Income • Prepaid Income

Accruals & Prepayments Introduction • There is difference between... EXPENSES INCURRED • PAID

Accruals & Prepayments Introduction • There is difference between... REVENUE EARNED • RECEIVED

Accruals & Prepayments Introduction • Expenses are therefore, time related, and are charged to the period to which they relate.

Accruals & Prepayments Accrued Expenses • An expense that the firm has used, but which has not yet been paid for. • Double Entry Accruals are debited to the expense accountso as to increase it and credited to the accrual account.

Accruals & Prepayments Accrued Expenses the transaction must be reported in the period that it was incurred and not the period that it was paid. If an expense is incurred in one period, that is the benefit was obtained but paid for in a future period

Accruals & Prepayments Accrued Expenses – Example • Assume that rent of $300,000 per year is payable at $75,000 at the end of every three months. The rent was not always paid on time. Details were as follows:

Accruals & Prepayments Accrued Expenses – Example • The rent account for the Year ended December 31, 2011 is as follows: Rent Account 300,000 Mar 31 Bank 75,000 Dec 31 Profit and Loss A/c 75,000 July 2 Bank Bank 75,000 Oct 4 Dec 31 Accrued Balance (c/d) 75,000 300,000 300,000 Jan 1 Jan 6 Bank 75,000 Accrued Bal b/d 75,000

Accruals & Prepayments Prepaid Expenses • An expense to be used up in a following period, but which has been paid for in advance. • Double Entry Prepayments are credited to the expense accountto reduce it and debited to the prepayment account.

Accruals & Prepayments Prepaid Expenses If an expense is paid for in one period for a future period • It must be charged to the future period. it is not related to the period in which it was paid

Accruals & Prepayments Prepaid Expenses • Such a transaction would require a transfer from the period in which it was paid to the period it is related to.

Accruals & Prepayments Prepaid Expenses – Example • Insurance for a firm is at the rate of 120,000 a year, starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows:

Accruals & Prepayments Prepaid Expenses – Example • The insurance account for the Year ended December 31, 2011 is as follows: Insurance Account 120,000 Feb 28 Bank 30,000 Dec 31 Profit and Loss A/c 60,000 Aug 31 Bank Prepaid Balance (c/d) Dec 31 Bank 60,000 Nov 18 30,000 150,000 150,000 Jan 1 Prepaid Bal b/d 30,000

Lecture Notes 4 Opening and Closing Accruals and Prepayments

Accruals & Prepayments Opening and Closing Prepaid Expenses –MODEL Expense Account Jan 1 Prepaid Bal b/d 00,000 Jan 1 Accrued Bal b/d 00,000 00,000 Payments Dec 31 Profit and Loss A/c 00,000 Dec 31 Prepaid Bal. (c/d) 00,000 Accrued Bal c/d 00,000 Dec 31 000,000 000,000

Accruals & Prepayments Opening and Closing Accrued Expenses – Example • Assume that rent of $300,000 per year is payable at $75,000 at the end of every three months. The rent was not always paid on time. Details were as follows:

Accruals & Prepayments Opening and Closing Accrued Expenses • The rent account for the Year ended December 31, 2011 is as follows: Rent Account 75,000 Mar 31 Bank 150,000 Jan 1 Accrued Bal b/d Dec 31 July 2 Bank 75,000 Profit and Loss A/c 300,000 Bank 75,000 Oct 4 Dec 31 Accrued Balance (c/d) 75,000 375,000 375,000 Jan 1 Accrued Bal b/d 75,000 Jan 6 Bank 75,000

Accruals & Prepayments Prepaid Expenses – Example • Insurance for a firm is at the rate of 120,000 a year, starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows:

Accruals & Prepayments Opening and Closing Prepaid Expenses – Example • The insurance account for the Year ended December 31, 2011 is as follows: Insurance Account 120,000 Jan 1 Prepaid Bal b/d 30,000 Dec 31 Profit and Loss A/c 30,000 Feb 28 Bank Prepaid Balance (c/d) Dec 31 Aug 31 Bank 60,000 30,000 Nov 18 Bank 30,000 150,000 150,000 Jan 1 Prepaid Bal b/d 30,000

Lecture Notes 4 Accrued Income

Accruals & Prepayments Accrued Income – Example • Our warehouse is lager than we need. We rent part of it to another firm for $60,000 per annum. Details for the year ended December 31 were as follows:

Accruals & Prepayments Accrued Income • The Rent Income account for the Year ended December 31, 2011 is as follows: Rent Income Account 60,000 Dec 31 Profit & Loss A/c April 4 Cash 15,000 15,000 July 6 Cash Oct 9 Cash 15,000 Dec 31 Accrued Balance (c/d) 15,000 60,000 60,000 Jan 7 Cash 15,000 Jan 1 Accrued Bal b/d 15,000

Our Confession ACT 110 Is EASY POP! Because, Passion is my Fuel

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