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.
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.
