Adjustment For Accruals And Prepayment
Adjustment for Accruals and
Prepayment
Adjustment to final accounts are usually made at the end of a financial year
Adjustments for accruals and prepayments are based on the accrual concept. The Accrual Concept
• The Accrual concept states that income and expenditure should be recorded in the period in which they are incurred and not when they are actually received or paid
Accrued Expenses
• Accrued expenses are those that are not paid in the accounting period in which they are due (incurred) but paid in the next accounting period.
Accrued Income
• Accrued Income is income not received in the accounting period they are due to be received but received in the following accounting period.
Treatment of Accrued Expenses
• There are two adjustments that are required for accrued expenses and revenues: – An adjustment to profit and loss
– An adjustment to balance sheet
Adjustment to Profit and Loss
• Any amount of expenses outstanding at the end of the year should be added to the total amount paid.
– Eg. If total rent paid for the year is $10000 and $2000 is still outstanding at the end of the year then in order to reflect the total amount used up (incurred) for the period then the
$2000 must be added to the $10000 in the profit and loss account. (The Accrual
Concept)
Adjustment to Balance Sheet
• An expense outstanding is a liability.
Since it is expected to paid within a short time (within a year) then it must be included among the current liabilities on the Balance sheet.
Treatment of Accrued Revenue
(Income)
• Revenue (Income) outstanding at the end of the year must be added to Gross Profit.
• Revenue outstanding is a current asset and therefore must be included among current assets on the balance sheet
Prepaid Expenses
• Prepaid expenses are expenses paid in advance i.e expenses paid before the period that they are due.
Treatment of Prepaid Expenses
• Expenses prepaid at the end of a period also has a two fold effect on the final accounts: –
Prepayment
Adjustment to final accounts are usually made at the end of a financial year
Adjustments for accruals and prepayments are based on the accrual concept. The Accrual Concept
• The Accrual concept states that income and expenditure should be recorded in the period in which they are incurred and not when they are actually received or paid
Accrued Expenses
• Accrued expenses are those that are not paid in the accounting period in which they are due (incurred) but paid in the next accounting period.
Accrued Income
• Accrued Income is income not received in the accounting period they are due to be received but received in the following accounting period.
Treatment of Accrued Expenses
• There are two adjustments that are required for accrued expenses and revenues: – An adjustment to profit and loss
– An adjustment to balance sheet
Adjustment to Profit and Loss
• Any amount of expenses outstanding at the end of the year should be added to the total amount paid.
– Eg. If total rent paid for the year is $10000 and $2000 is still outstanding at the end of the year then in order to reflect the total amount used up (incurred) for the period then the
$2000 must be added to the $10000 in the profit and loss account. (The Accrual
Concept)
Adjustment to Balance Sheet
• An expense outstanding is a liability.
Since it is expected to paid within a short time (within a year) then it must be included among the current liabilities on the Balance sheet.
Treatment of Accrued Revenue
(Income)
• Revenue (Income) outstanding at the end of the year must be added to Gross Profit.
• Revenue outstanding is a current asset and therefore must be included among current assets on the balance sheet
Prepaid Expenses
• Prepaid expenses are expenses paid in advance i.e expenses paid before the period that they are due.
Treatment of Prepaid Expenses
• Expenses prepaid at the end of a period also has a two fold effect on the final accounts: –