Accruals and prepayments Cambridge IGCSE Accounting revision
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In plain words
Bills do not arrive neatly at the year end. Some of this year's electricity will be paid for next year. Some of next year's insurance has already been paid. The profit for a year must use the costs and income that belong to that year, whenever the money moved.
6 things to know
- The matching (accruals) concept: income and expenses are recorded in the period they relate to, not when the money is received or paid.
- An accrued expense is owed at the year end. Add it to the expense. It is a current liability, shown as other payables.
- A prepaid expense has been paid in advance for next year. Deduct it from the expense. It is a current asset, shown as other receivables.
- Accrued income has been earned but not yet received. Add it to the income. It is a current asset (other receivables).
- Prepaid income has been received in advance. Deduct it from the income. It is a current liability (other payables).
- In the ledger, the amount is carried down at the year end. An accrued expense is a credit balance brought down on the expense account. A prepaid expense is a debit balance brought down.
Worked example
The financial year ends on 31 December. Insurance of $3600 was paid on 1 October for the next twelve months. Electricity paid in the year was $2100, and $350 is owing at the year end. Find the expense for each.
- Insurance: only October, November and December belong to this year. 3600 × 3/12 = $900. The other $2700 is prepaid.
- Electricity: the $350 owing was used this year. 2100 + 350 = $2450.
Tips and tricks
- Count the months carefully, and write out which months fall in this year. Most errors here are counting errors.
- Start-of-year balances work the opposite way to end-of-year ones. A prepayment at the start is added to this year's expense. An accrual at the start is deducted.
It lands in your notebook with its questions as flashcards.
Accruals and prepayments: 6 questions and answers
These are the quiz’s questions. Do the quiz first, then come back here for the ones that got you.
What is an accrued expense?
It is added to the expense and shown as a liability.
How is a prepaid expense shown in the statement of financial position?
The business is owed a service it has already paid for.
Insurance of $1200 was paid on 1 July for one year. The year ends on 31 December. How much is prepaid?
January to June of next year: six months.
Electricity paid was $3000, with $400 owing at the year end. What is the expense for the year?
The amount owing is added.
Rent received in advance at the year end is:
The business owes the tenant the use of the property.
Which concept requires accruals and prepayments to be adjusted for?
Costs and income are matched to the year they belong to.
Quiz
6 questions
Tap an answer and you’ll see straight away whether it’s right, and why.
Worksheet
3 questions, 7 marks. Write your answers on paper, then check them.
Accruals and prepayments
Cambridge IGCSE Accounting 0452 · 7 marks · papermunch.org
Name ______________________________ Date ______________
Rent paid during the year was $7800. At the start of the year $600 was prepaid, and at the end of the year $650 was prepaid. Calculate the rent expense for the year.[3]
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$7750. 7800 + 600 − 650.
Wages of $420 are owing at the year end. State how this is shown in the statement of financial position.[2]
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As a current liability: other payables $420.
A business lets part of its premises. At the year end the tenant owes $300 of rent. State the effect on income and how the $300 is shown in the statement of financial position.[2]
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$300 is added to rent received. It is a current asset: other receivables $300.
Answers: Accruals and prepayments
- 1. $7750. 7800 + 600 − 650.
- 2. As a current liability: other payables $420.
- 3. $300 is added to rent received. It is a current asset: other receivables $300.