Class notes
Lecture notes for the introduction to Accruals and prepayments
- Course
- Institution
This document describes what accruals and prepayments are and then looks into how to account for them and what entries to make.
[Show more]
Seller
Follow
vickylongstaff2002
Content preview
Accruals and prepayments Accrual accounting relates to the idea of presenting income earned and expenses incurred in
the SPL and SFP in the reporting period which sales occurred instead of when cash is
paid/received.
When expenses are incurred but not paid for, we either carry the expense forward into the
subsequent period in what is called a prepayment or write it in the journals before it has
been paid i.e an accrual.
So accruals are amounts owed by the business for the accounting period and accrual
expenses are expenses charged against profit even though they haven’t been paid.
And prepayments are amounts paid in advance by the business for the following period and
prepaid expenses are expenses paid in one period but not charged against profit until a later
period.
When accounting for accruals, the expense appears in SPL where the accrual appears in the
SFP as a current liability.
As a journal entry, accruals are credited, and expenses are debited. Then in order to not
double count expenditure, they must be reversed at the start of the next period.
When accounting for prepayments, we debit prepayments and credit expense. Then they
must be reversed at the beginning of the following period, so debit expense and credit
prepayment.
In the SFP, prepayments are a current asset and an expense in SPL.
Aswell as expenses, accruals work for income. Accrued income is revenue due but not
received at the end of a period. It is adjusted for by crediting revenue or other income and
debiting accrued income. Accrued income is also an asset in SFP.
Deferred income is received in advance. In journal entries this debits revenue or other
income and credits deferred income as it is a current liability in SFP.
The benefits of buying summaries with Stuvia:
Guaranteed quality through customer reviews
Stuvia customers have reviewed more than 700,000 summaries. This how you know that you are buying the best documents.
Quick and easy check-out
You can quickly pay through credit card or Stuvia-credit for the summaries. There is no membership needed.
Focus on what matters
Your fellow students write the study notes themselves, which is why the documents are always reliable and up-to-date. This ensures you quickly get to the core!
Frequently asked questions
What do I get when I buy this document?
You get a PDF, available immediately after your purchase. The purchased document is accessible anytime, anywhere and indefinitely through your profile.
Satisfaction guarantee: how does it work?
Our satisfaction guarantee ensures that you always find a study document that suits you well. You fill out a form, and our customer service team takes care of the rest.
Who am I buying these notes from?
Stuvia is a marketplace, so you are not buying this document from us, but from seller vickylongstaff2002. Stuvia facilitates payment to the seller.
Will I be stuck with a subscription?
No, you only buy these notes for $5.37. You're not tied to anything after your purchase.
Can Stuvia be trusted?
4.6 stars on Google & Trustpilot (+1000 reviews)
81503 documents were sold in the last 30 days
Founded in 2010, the go-to place to buy study notes for 14 years now