C hapter 20: Accruals and prepayments
Contents of chapter
This chapter covers year-end adjustments for:
(i) Accrued expenses.
(ii) Prepaid expenses.
(iii) Revenues in arrears.
(iv) Revenues in advance.
Notes for teachers
Until now adjustments have been left out of final accounts. This was done deliberately, to make it easier
1
for students to learn and teachers to teach.
The most difficult part is that shown in Section 20.7 Example 2, where there are adjustments at both the
2
opening and closing of a period.
Students should remember, in respect of adjustments:
3
(i) Accrued expenses always result in credit balances (current liabilities).
(ii) Prepaid expenses always result in debit balances (current assets).
(iii) Revenues in arrears always result in debit balances (current assets).
(iv) Revenues in advance always result in credit balances (current liabilities).
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Answers to MCQs and exercises
20.1 B 20.2 B 20.3 D 20.4 A 20.5 B
20.6
(a) Rent
20X8 $ 20X8 $
Dec 31 Bank 1,600 Dec 31 Profit and loss 2,000
" 31 Accrued c/f 400
2,000 2,000
(b) Insurance
20X8 $ 20X8 $
Dec 31 Bank 900 Dec 31 Profit and loss 635
" 31 Prepaid c/f 265
900 900
(c) Rates
20X8 $ 20X8 $
Jan 1 Bank 750 Dec 31 Profit and loss 1,500
Jul 1 Bank 1,125 " 31 Prepaid c/f 375
1,875 1,875
(d) Rent Receivable
20X8 $ 20X8 $
Dec 31 Profit and loss ($400 × 12) 4,800 Apr 15 Bank 2,000
" 31 In advance c/f 1,600 Dec 15 Bank 4,400
6,400 6,400
20.7X
(a) General Expenses
20X5 $ 20X5 $
Dec 31 Bank 615 Dec 31 Profit and loss 559
" 31 Prepaid c/f 56
615 615
(b) Commission Receivable
20X5 $ 20X5 $
Dec 31 Profit and loss 3,231 Dec 31 Bank 3,056
" 31 In arrears c/f 175
3,231 3,231
(c) Carriage Outwards
20X5 $ 20X5 $
Dec 31 Bank 666 Dec 31 Profit and loss 788
" 31 Accrued c/f 122
788 788
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(d) Insurance
20X5 $ 20X5 $
Jan 1 Bank 1,080 Dec 31 Profit and loss 1,440
Oct 1 Bank 1,080 " 31 Prepaid c/f ($1,080 × 6 ) 720
9
2,160 2,160
20.8
C Chang
Trading and Profit and Loss Account for the year ended 31 December 20X8
$ $
Sales 18,590
Less Cost of goods sold:
Opening stock 2,050
Add Purchases 11,170
13,220
Less Closing stock 3,910 9,310
Gross profit 9,280
Less Expenses:
Rent ($640 – $160) 480
Wages and salaries ($2,140 + $290) 2,430
Insurance ($590 – $190) 400
Telephone ($300 + $110) 410
General expenses 180 3,900
Net profit 5,380
20.9X
K Chuen
Trading and Profit and Loss Account for the year ended 31 December 20X7
$ $
Sales 54,190
Less Returns inwards 200 53,990
Less Cost of goods sold:
Opening stock 8,620
Add Purchases 30,560
39,180
Less Closing stock 12,120 27,060
Gross profit 26,930
Less Expenses:
Wages and salaries ($4,960 + $510) 5,470
Motor expenses 2,120
Rent and rates ($1,200 – $160) 1,040
Discounts allowed 290
Lighting expenses ($580 + $170) 750
Computer running expenses ($1,210 – $140) 1,070
General expenses 360 11,100
Net profit 15,830
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20.10
Happy Wong
Profit and Loss Account for the year ended 31 December 20X7
$ $
Revenue 10,400
Less Expenses:
Advertising 230
2
Car expenses ($480 × ) 320
3
Rates ($140 – $30) 110
Telephone 110
Sundry expenses 1,200
Cleaning 50 2,020
Net profit 8,380
Happy Wong
Balance Sheet as at 31 December 20X7
Fixed Assets $ $
Freehold premises 6,000
Equipment 720
Car 1,320
8,040
Current Assets
Prepaid expenses 30
Bank 5,400
Cash 40
5,470
Less Current Liabilities
Accrued expenses 50
Net current assets 5,420
13,460
Financed by:
Capital as at 1 January 20X7 9,740
Add Net profit for the year 8,380
18,120
1
Less Drawings ($4,500 + $480 × ) 4,660
3
13,460
20.11
T Lee
Profit and Loss Account for the year ended 30 June 20X6
$ $
Fees charged 88,600
Less Expenses:
Wages and salaries ($31,960 + $2,320) 34,280
Postage and stationery ($2,140 + $220) 2,360
Telephone 1,250
Computer running expenses 2,190
Travel expenses ($1,620 × 90%) 1,458
Insurance ($890 – $170) 720
Rent ($3,000 – $600) 2,400
Sundry expenses 520 45,178
Net profit 43,422
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T Lee
Balance Sheet as at 30 June 20X6
$ $
Fixed Assets
Fixtures 10,800
Equipment 25,400
36,200
Current Assets
Debtors 11,100
Prepaid expenses ($600 + $170) 770
Bank 8,090
Cash 120
20,080
Less Current Liabilities
Accrued expenses ($220 + $2,320) 2,540
Net current assets 17,540
53,740
Financed by:
Capital as at 1 July 20X5 39,680
Add Net profit for the year 43,422
83,102
Less Drawings ($29,200 + $1,620 × 10%) 29,362
53,740
20.12X
L Tak
Trading and Profit and Loss Account for the year ended 31 December 20X6
$ $ $
Sales 120,320
Less Returns inwards 1,384 118,936
Less Cost of goods sold:
Opening stock 30,816
Add Purchases 84,290
Less Returns outwards 810 83,480
Add Carriage inwards 309
114,605
Less Closing stock 36,420 78,185
Gross profit 40,751
Add Other revenues:
Discounts received 506
Rent receivable 250
41,507
Less Expenses:
Discounts allowed 410
Carriage outwards 218
Motor expenses ($4,917 + $33) 4,950
Repairs to premises 1,383
Salaries and wages 16,184
Sundry expenses ($807 + $62) 869
Rates and insurance ($2,896 – $166) 2,730
Loan interest 4,000 30,744
Net profit 10,763
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L Tak
Balance Sheet as at 31 December 20X6
$ $ $
Fixed Assets
Premises 40,000
Motor vehicles 11,160
51,160
Current Assets
Stock 36,420
Debtors 31,640
Prepaid expenses 166
Revenues in arrears 250
Bank 4,956
Cash 48
73,480
Less Current Liabilities
Creditors 24,320
Accrued expenses ($4,000 + $62 + $33) 4,095 28,415
Net current assets 45,065
96,225
Less Long-term Liabilities
Loan from P Ho 40,000
56,225
Financed by:
Capital as at 1 January 20X6 54,198
Add Net profit 10,763
64,961
Less Drawings 8,736
56,225
20.13X
The Journal
Dr Cr
$ $
Bank 340,000
Rent receivable 340,000
Rent receivable 303,000
Profit and loss ($340,000 + $24,000 – $65,000 – $38,000 + $42,000) 303,000
Insurance 18,000
Bank 18,000
Profit and loss 16,500
3 3
Insurance [$18,000 + ($12,000 × 12 ) – ($18,000 × 12 )] 16,500
20.14
Insurance
20X6 $ 20X6 $
Jun 30 Balance b/f 7,900 Jun 30 Profit and loss 6,950
1
" 30 Prepaid c/f ($1,900 × ) 950
2
7,900 7,900
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Telephone
20X6 $ 20X6 $
Jun 30 Balance b/f 4,700 Jun 30 Profit and loss 5,200
" 30 Accrued c/f 500
5,200 5,200
Rental Income
20X6 $ 20X6 $
Jun 30 Profit and loss 120,000 Jun 30 Balance b/f 130,000
" 30 In advance c/f 10,000
130,000 130,000
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