Accounting: Accrual Prepayment
|ADJUSTMENT FOR ACCRUALS AND PREPAYMENTS |
|Learning outcome |
|Explain the foundations of accruals and prepayments, including the nature of the resulting change in the income statement. |
|Show the entries for accruals and prepayments in the journal, ledger and final accounts. |
|Prepare the final accounts from a trial balance making the required adjustment for accruals and prepayments. |
The Accrual Concepts The accruals concept dictates that costs are recognized as they are incurred, not when money is paid. An accrual is an amount outstanding for a service provided during a particular accounting period that is still to be paid for at the end of it. It is expected that the amount due will be settled in cash in a subsequent accounting period.
THE ACCRUALS EXPENSES
The term accrued expenses refer to an expense that the business has incurred but has not yet paid yet. Normally the accountant waits till the end of period to make an adjustment before the financial statement is prepared.
Guideline for accruals expenses 1. Accrual = not paid yet, still owing, outstanding, still due 2. Income statement = the expenses paid ADD the accrual amount 3. Balance sheet = the accrued amount is shown as current liabilities
Accounting entries: Example 1 : Assume that rent of RM 4000 per year is payable at the end of every quarter :
|Amount |Rent due |Rent paid |
|RM 1000 |31 March 2012 |31 March 2012 |
|RM 1000 |30 June 2012
|Learning outcome |
|Explain the foundations of accruals and prepayments, including the nature of the resulting change in the income statement. |
|Show the entries for accruals and prepayments in the journal, ledger and final accounts. |
|Prepare the final accounts from a trial balance making the required adjustment for accruals and prepayments. |
The Accrual Concepts The accruals concept dictates that costs are recognized as they are incurred, not when money is paid. An accrual is an amount outstanding for a service provided during a particular accounting period that is still to be paid for at the end of it. It is expected that the amount due will be settled in cash in a subsequent accounting period.
THE ACCRUALS EXPENSES
The term accrued expenses refer to an expense that the business has incurred but has not yet paid yet. Normally the accountant waits till the end of period to make an adjustment before the financial statement is prepared.
Guideline for accruals expenses 1. Accrual = not paid yet, still owing, outstanding, still due 2. Income statement = the expenses paid ADD the accrual amount 3. Balance sheet = the accrued amount is shown as current liabilities
Accounting entries: Example 1 : Assume that rent of RM 4000 per year is payable at the end of every quarter :
|Amount |Rent due |Rent paid |
|RM 1000 |31 March 2012 |31 March 2012 |
|RM 1000 |30 June 2012