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Slide 28.

Chapter 28
Accruals and prepayments for
financial statements

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.2

Learning objectives
After you have studied this chapter, you
should be able to:
Adjust expense accounts for accruals and
prepayments
Show accruals, prepayments in the
statement of financial position

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.3

Learning objectives (Continued)


Ascertain

the amounts of expense and


revenue items to be shown in the income
statement after making adjustments for
accruals and prepayments

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.4

Learning objectives (Continued)


Prepare

accrual and prepayment entries


to the accounts using two different
methods

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.5

The financial statements


The

financial statements need to contain


the expenditure relating to the period.
Therefore, if expenditure is owing or has
been overpaid, an adjustment is needed.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.6

The financial statements (Continued)


Example Two businesses are renting
buildings and are charged 6,000 per year.
Business A pays 5,000 in the year. It
therefore owes 1,000, but the rent
expense in the income statement must be
shown as 6,000.(Matching Principle)
Business B pays 6,500 in the year. It has
therefore overpaid 500, but the rent
expense in the income statement must be
shown as 6,000.
Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.7

Accrued expenses
Rent of 4,000 per year as payable at the
end of every three months. The rent was
paid on time in March, but this is not
always the case.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.8

Accrued expenses (Continued)


The rent for the last quarter was paid on 5
January, which is after year end, so the
books will appear as:

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.9

Accrued expenses (Continued)


The true rent figure for the year must be
shown in the profit and loss account

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.10

Accrued expenses (Continued)


The accrued rent expense must be shown
on the rent account

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.11

Prepaid expenses
Insurance for a business is at the rate of
840 a year, starting from 1 January 2011.
The business has agreed to pay this at the
rate of 210 every three months. However,
payments were not at the correct times.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.12

Prepaid expenses (Continued)


The insurance has been paid at odd
times, and so when the correct figure is
taken to the profit and loss account, the
books will appear as:

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.13

Expense accounts covering more than


one period
It

is more likely that there will be opening


accruals and prepayments on an account.
This really tests your knowledge of double
entry bookkeeping and you will have to
distinguish between accruals and
prepayments and the beginning and the
end of the year.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012

Slide 28.14

Activity
Office supplies having original cost $4,320 were unused till the end of the
period. Office supplies having original cost of $22,800 are shown on unadjusted
trial balance.
Prepaid rent of $36,000 was paid for the months January, February and March.
The equipment costing $80,000 has useful life of 5 years and its estimated
salvage value is $14,000. Depreciation is provided using the straight line
depreciation method.
The interest rate on $20,000 note payable is 9%. Accrue the interest for one
month.
$3,000 worth of service has been provided to the customer who paid advance
amount of $4,000.

Frank Wood and Alan Sangster, Frank Woods Business Accounting 1, 12th Edition, Pearson Education Limited 2012