ACCRUALS AND PREPAYMENTS

Objectives

At the end of the lesson pupils should understand

• The matching concept and its importance when preparing the income
statement.
• Accounting treatment of:
Accrued expenses.
Prepaid expenses.
Accrued income.
Prepaid income.

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Introduction

An income statement account relates to a specified period of time (which should be

indicated in the heading of that account.)

Only costs and revenues which relate to that period of time should be included in the
account.

Adjustments must be made for

- Items which relate to the year but have not actually been paid or received.
- Items which have been paid or received during the year but relate to a different
period of time.
This is an application of the matching concept.

Accrued Expenses

- It is an amount due in an accounting period, which is unpaid at the end of that

period.
- A benefit or service received during an accounting period remains unpaid at the
end of that period.
- An accrued expense is a current liability in the statement of financial position.

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Illustration

Zed’s financial year ends on 31 December. He rents a workshop at an annual rent of $4

800, payable in four quarterly instalments of $1 200.

During 2018, Zed paid rent by cheque as follows:

2018 $
- January 1 1 200
- April 1 1 200
- July 1 1 200

The rent due on 1 October remained unpaid on 31 December 2018.

Required

a. Write up the rent account in Zed’s ledger for the year ended 31 December 2018.
b. Prepare a relevant extract from Zed’s income statement account for the year
ended 31 December 2018.
c. Prepare a relevant extract from Zed’s statement of financial position extract as
at 31 December 2018.

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Practice Questions

Question 1

Peter’s financial year ends on 30 November. On 1 December 2018, he owed $485 for
electricity. During the year ended 30 November 2019, he made the following payments
by cheque.

2019 $
14 January 485
18 May 1 283
7 August 894

At 30 November 2019, he owed $778 for electricity.

For the year ended 30 November 2019 prepare

a. Electricity account clearly showing the amount to be transferred to the

income statement – (start with the opening balance.) [6]
b. Extract from the Income statement. [2]
c. Extract from the statement of financial position [2]

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Question 2

Boni is a sole trade trader whose financial year ends on 31 July. She provides the
following information on the property expenses account:

2021 Transaction $
August 1 Amount owing 670
August 21 Paid the balance on 1 August by cash
December Paid property expenses by cheque 3 420
3
2022
May 18 Paid property expenses by cheque 2 780
31 July Amount owing 420

Required

a. Prepare the property expenses account for the year ended 31 July 2022. Clearly
show the transfer to the income statement.
b. Prepare the extract from the income statement for the year ended 31 July 2022.
[2]
c. Prepare the extract from the statement of financial position at 31 July 2022.

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Question 3

Chido is a sole trader whose financial year ends on 31 March. She provides the
following on advertising expenses account.

$
Amount owing
- 1 April 2020 760
Payment by cheque ?
Transfer to the income statement – 31 March 2021 8 720
Amount owing
- 31 March 2021 1 280

Required

Prepare the advertising expenses account for the year ended 31 March 2021, clearly
showing the amount paid.

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Question 4

Brown is a sole trader whose financial year ends on 31 May. He rents some offices at $6
720 per annum.

On 1 June 2020 he owed two months’ rent.

The following transactions took place during the year ended 31 May 2021.

2020
June 12 Paid rent owing on 1 June 2020 by cash.
August 1 Paid rent by cheque $5 040

Required

a. Prepare the rent payable account for the year ended 31 May 2021. Balance off
the account and bring down the balance on 1 June 2021.
b. Prepare the income statement extract for the year ended 31 May 2021.
c. Prepare the statement of financial position extract at 31 May 2021.

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Question 5

On 1 January 2022 a business has an outstanding invoice for fuel of $70.

The following transactions took place during the month:
Jan 6 Paid the outstanding balance on 1 January by cash.
Jan 13 Bought fuel for $300 by cheque.

At 31 January it has an outstanding fuel invoice of $120.

Required
Prepare the motor expenses account for the month of January 2022.

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Prepaid expenses

- A prepaid expense is when a payment is made in advance of the period to which

it relates.

- An amount is paid during an accounting period for a benefit or service to be

received in a future period.
- A prepaid expense is a current asset in the statement of financial position.

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Illustration

Tino’s financial year ends on 31 December. He provides the following information

concerning the rent payable account.

$
Amount prepaid
- 1 Jan 2016 450
- 31 December 2016 1 350

On 1 February 2016 he paid rent by cheque $6 300.

Required

a. Prepare the rent account clearly showing amount to be shown in the income
statement for the year ended 31 December 2016.
b. Prepare the income statement extract for the year ended 31 December 2016.
c. Prepare the statement of financial position extract at 31 December 2016.

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Practice Questions

Question 1

Rukudzo is a sole trader whose financial year ends on 30 June. She rents garage space
at $3 120 per annum.

On 1 July 2021 she had prepaid three months’ rent.

The following transactions took place during the year ended 30 June 2022:

2021
September 3 Paid rent by cheque $1 560
2022
March 7 Paid rent by cash $1 300

Required

a. Prepare the rent payable account for the year ended 30 June 2022. Clearly show
the transfer to the income statement.
b. Prepare the income statement extract for the year ended 30 June 2022.
c. Prepare the statement of financial position extract at 30 June 2022.

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Question 2

Ruth is a trader. Her financial year ends on 31 March. She provides the following
information:

$
2013
April 1 Insurance prepaid for 3 months to June 2013 600
amounted to
July 1 Paid insurance premium for 12 months to 30 June 2 640
2014 by cheque

Required

a. Prepare the insurance account as it would appear in Ruth’s ledger for the year
ended 31 March 2014. Show clearly the amount transferred to the Income
Statement.
b. Prepare the income statement extract for the year ended 31 March 2014
c. Prepare the statement of financial position extract at 31 March 2014

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Question 3

T Green’s financial year ends on 31 May. On 1 June 2019, she owed $150 for rent.

The following transactions took place for the year ended 31 May 2020

2019
June 4 Paid the balance owing at 1 June by cash.
June 20 Paid rent for six months to 30 November 2019 by cheque - $900
Dec 2 Paid rent for eight months ending 31 July 2020 by cheque - $1 200

Required

a. How many months were paid in advance at 31 May 2020 [1]

b. Calculate the amount of rent paid in advance at 31 May 2020 [2]

For the year ended 31 May 2020 prepare

c. Rent account clearly showing the amount transferred to the income statement.
Start with the opening balance at 1 June 2019. [6]
d. Income statement extract [2]
e. Statement of financial position extract [2]

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Question 4

Azad maintains a ledger account for general expenses. On 1 January 2019 there was a
prepayment of $176. On 31 December 2019 there was an accrual of $212. The amount
transferred to the income statement for the year was $10 690.
Required
Prepare the general expenses account clearly showing the amount paid during the year
ended 31 December 2019.

Question 5

Tadiwa’s financial year ends on 30 September. The following information has been
provided regarding the sundry expenses account.

$
Oct 1, 2020 – amount prepaid 320
Sep 30, 2021 – amount owing 630
Transfer to the income statement for the year ended 30 7 380
September 2021

Required

Prepare the sundry expenses account clearly showing the amount paid during the year
ended 30 September 2021.

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Another form of prepayment

- A prepayment can also take place when items such as stationery, packing
materials and postage stamps are not fully used up within the financial year.
- Such inventory is a form of prepayment and is treated the same as expenses
prepaid.

NB

This inventory must not be included in the inventory for resale.

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Illustration
You are given the following information:

2016
Jan 1 Inventory of stationery $30.
Apr 5 Purchase of stationery by cheque $50.
Nov 15 Purchase of stationery on credit from Acme Printers $80
Dec 20 Purchase of stationery from petty cash $5.
31 Inventory of stationery $15.

Required

a. Prepare the stationery account of a firm for the year ended 31 December 2016
b. Prepare the income statement extract for the year ended 31 December 2016.
c. Prepare the statement of financial position extract at 31 December 2016.

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Practice Questions

Question 1

From the following particulars prepare A. Quinn’s stationery account for the year ended
31 October 2016 and balance off the account.

2015
Nov 1 Inventory of unused stationery $120
Dec 13 Bought stationery by cheque $200
2016
Jan 7 A Quinn took stationery worth $37 for personal use
June 28 Bought stationery on credit from Office World Ltd. $150
Oct 31 Inventory of unused stationery $90

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Question 2

Riaz is a trader in clothing. The following balances were taken from his books of
account at 1 January 2012.

$
Rent 6 000 Dr
Commission payable 1 700 Cr
Stationery 120 Dr

He made the following payments.

2012 $
February 28 rent for six months to 31 August 2012 18 000
September 1 rent for six months to 28 February 2013 19 800
Total payments to the salesmen for commission 18 100
Total payments for stationery 1 880

Other information is as follows.

1. Commission due on 31 December 2012 amounted to $1150.

2. The charge for stationery in the income statement for the year ended 31
December 2012 was $1910.

Required
a. Prepare the following ledger accounts for the year ended 31 December 2012.
Balance the accounts and bring down the balances on 1 January 2013.
i. Rent account [6]
ii. Commission payable account [5]
iii. Stationery account [5]

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 b. Complete the table below. The first item has been completed as an example. [4]

Ledger account Statement of financial position

Heading Item
Rent Current assets Other receivables
Commission payable
Stationery

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Accrued Income

- If an item of income is accrued, it means that a person receiving a benefit or

service provided by the business during an accounting period has not paid for
this at the end of the firm’s financial year.
- The income transferred to the Income statement account must relate to that
particular period.

- Accrued income is a current asset in the statement of financial position.

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Illustration

Fransy’s financial year ends on 31 December. She acts as an agent for Excel Designs
and receives commission on all orders she takes on behalf of Excel Designs. The
commission is paid in arrears at the end of each four months period.

Fransy received cheques from Excel Designs as follows:

$
2016
- May 3 280
- September 18 210

At 31 December 2016 Excel Designs owed commission to Fransy amounting to $258 for
the period 1 September to 31 December 2016.

Required

a. Write up the commission receivable account in Fransy’s ledger for the year
ended 31 December 2016.
b. Prepare a relevant extract from Fransy’s income statement account for the year
ended 31 December 2016.
c. Prepare a relevant extract from Fransy’s statement of financial position as at 31
December 2016.

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Practice Questions

Question 1

Bob’s financial year ends on 31 March. He sublets part of his premises to Kim at $280
per month. Bob provided the following information:

2020
April 1 Kim owed two months’ rent.
April 20 Received cash for the amount owing on 1 April.
June 18 Kim paid rent by cheque $2 520

Required

For the year ended 31 March 2021

a. Prepare the rent receivable account as it would appear in Bob’s ledger. Show
clearly the amount transferred to the income statement. Balance off the
account and bring down the balance on 1 April 2021.
b. Prepare the income statement extract.
c. Prepare the statement of financial position extract.

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Question 2

Mendy’s financial year ends on 31 July. She sells laptops on behalf of IT solutions and
receives commission.

The following information is provided for the year ended 31 July 2021.

Commission receivable due $

- 1 August 2020 1 380
- 31 July 2021 1 860

Income statement extract for the year ended 31 July 2021

$ $
Other income
Commission receivable 5 720

Required

Prepare the commission receivable account for the year ended 31 July 2021, clearly
showing the amount received within the account. Balance off the account and bring
down the balance on 1 August 2021. [6]

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Question 3

Claris specialises in selling motor spares. Her financial year ends on 31 May. She rents
out garage space to Blake at an annual fee of $7 500.

She provided the following information for the year ended 31 May 2021:

2020
June 1 Blake owed one month’s rent.
July 3 Claris received rent by credit transfer $3 125
2021
Jan 3 Blake paid rent by cash $2 500

Required

For the year ended 31 May 2021

a. Prepare the rent receivable account as it would appear in Claris ledger. Show
clearly the amount transferred to the income statement. Balance off the
account and bring down the balance on 1 June 2021.
b. Prepare the income statement extract for the year ended 31 May 2021.
c. Prepare the statement of financial position extract on 31 May 2021.

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Prepaid Income

- If an item of income is prepaid, or paid in advance, it means that a person has

paid for a benefit or service, but at the end of the firm’s financial year this has not
yet been provided by the business.
- It is shown as a current liability in the statement of financial position.

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Illustration

Kingsley’s financial year ends on 31 December.

He sublets part of his workshop to his brother, at an annual rent of $900, payable in two
equal instalments on 1 January and 1 July each year. Kingsley received cheques from
his brother, for $450 each, on 1 January, 1 July and 31 December 2017.

Required

a. Write up the rent received account in Kingsley’s ledger for the year ended 31
December 2017.
b. Prepare a relevant extract from Kingsley’s income statement account for the
year ended 31 December 2017.
c. Prepare a relevant extract from Kingsley’s statement of financial position as at
31 December 2017.

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Practice Questions

Question 1

Nancy Tanwin owns a clothing store. Her financial year ends on 31 October. She lets
part of her premises to Gemstones Ltd at an annual rent of $2 592. On 1 November
2011 Gemstones Ltd prepaid two months’ rent. On 1 January 2012 Nancy Tanwin
received a cheque for $1 296 for rent to 30 June 2012. On 1 July 2012 she received a
further cheque for $1 080 for rent to 30 November 2012.

Required

a. Write up the rent received account as it would appear in Nancy Tanwin’s ledger
for the year ended 31 October 2012. [6]
b. State the section of the statement of financial position prepared on 31 October
2012 in which the balance of the rent received account would appear. Give a
reason for your answer. [2]

On 1 November 2011 Nancy Tanwin owed advertising expenses of $74. She paid this
outstanding amount in cash on 15 November 2011. On 1 June 2012 Nancy Tanwin paid
$1200 by cheque for an advertising campaign which was for twelve months to 31 May
2013.

Required

c. Write up the advertising expenses account as it would appear in Nancy Tanwin’s

ledger for the year ended 31 October 2012. [6]

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Question 2

Simon Nyemba sells farm machinery. His financial year ends on 31 January. Mochudi
Traders Ltd pay Simon Nyemba a commission on any goods purchased from them by
Simon’s customers. The commission is paid six-monthly in arrears. On 1 February 2011
Simon Nyemba was owed $280 in commission. Simon Nyemba received cheques for
commission as follows:

$
5 February 2011 280
3 August 2011 312

On 31 January 2012 Simon Nyemba was owed $296 commission.

Required

a. Write up the commission received account as it would appear in Simon

Nyemba’s ledger for the year ended 31 January 2012. [6]
Simon Nyemba owns premises and pays property tax to the authorities. On 1
February 2011 two months’ property tax, $520, was prepaid. On 24 April 2011
Simon Nyemba paid $1620 by cheque for property tax for six months to 30
September 2011. On 4 October 2011 he paid a further cheque for $1620 for
property tax for six months to 31 March 2012.

Required

b. Write up the property tax account as it would appear in Simon Nyemba’s ledger
for the year ended 31 January 2012. [6]
c. Name the accounting principle applied in the preparation of the commission
received account and the property tax account. [1]
d. Prepare the income statement extract for the year ended 31 January 2012
e. Name the section of Simon Nyemba’s statement of financial position on 31
January 2012 in which each of the following balances would appear.
i. Commission receivable account [1]

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 ii. Property tax account [1]

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Question 3

The following balances were extracted from the books of M. Cherry, a trader, on 1 July
2005.

$
Rent 250 Cr
Rates 100 Dr

Open ledger accounts with these balances and then enter the following transactions for
the year to 30 June 2006:

i. Rent paid by cheque $3 500.

ii. Rates paid by cash $900.
After entering these items, the accounts are to be balanced at 30 June 2006 that is at
the end of the financial year, taking into account the following information:

i. Rent $350 was prepaid.

ii. Rates $300 were outstanding.
Pay special attention to dates and detail, ensuring that the transfers to the Income
statement are shown clearly.

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Question 4

The following balances have been taken from the books of Singh Limited.

1 Jan 2006 31 Dec 2006

$ $
Commission receivable 1 040 owing 2 050 owing
Electricity 900 owing 600 owing
Rent 2 400 prepaid 3 000 prepaid

During the year ended 31 December 2006, the following transactions took place. All the
transactions were carried out through the bank account.

$
Commission received 3 940
Electricity paid 7 600
Rent paid 29 200

Required
a. Prepare the following ledger accounts. Include in each case the transfer to the
income statement account for the year ended 31 December 2006, and the
balance carried down to the next financial year.
i. commission receivable [4]
ii. electricity account [4]
iii. rent [4]
b. Discuss the reasons for accounting for accruals and prepayments in final
accounts. [4]

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Question 5

Amina Hassan’s financial year ends on 30 April. She sub-lets part of her premises to
Mariam Kamel. Amina provided the following information:

2001 $
May 1 Mariam owed 1 month’s rent 60
July 1 Marian paid rent for 15 months to 30 June 2002 by 900
cheque

Required:
Prepare the rent received account as it would appear in Amina Hassan’s ledger for the
year ended 30 April 2002. Show clearly the amount transferred to the Income
Statement and the balance on 1 May 2002.

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Question 6

Ben is a trader. His financial year ends on 31 December. He rents business premises.
The monthly rent of $1 450 payable in advance on the first day of each month, was
increased to $1 550 from 1 July 2017. Ben paid six months’ rent in advance by cheque
on the following dates in 2017: 1 January, 1 July and 31 December.
Required

a. Prepare the rent payable account in Ben’s ledger for the year ended 31
December 2017. Balance the account and bring down the balance on 1
January 2017.

b. Prepare a relevant extract from Ben’s statement of financial position at 31

December 2017.
Ben sublets part of his business premises to a tenant. The monthly rent is $350. The
rent receivable account in Ben’s ledger for the year ended 31 December 2017 was as
follows:

Rent receivable
Date Details $ Date Details $
2017 2017
Jan 1 Balance b/d 750 Jan 10 Bank 3 000
Dec 31 Income 4 500 Jun 1 Bank 3 375
statement
Balance c/d 1 125
6 375 6 375
2018
Jan 1 Balance b/d 1 125

c. Name the ledger in which this account would appear.

d. Explain each entry in the account.
e. State where the balance on the account on 31 December 2017 would appear
in the statement of financial position.

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On 1 January 2017 Ben had stationery valued at $75. During the year ended 31
December 2017 the following transactions took place:

February 1 Purchased stationery $165 and paid in cash.

August 31 Purchased stationery $40, using petty cash.

Ben’s inventory of stationery on 31 December 2017 was valued at $68.

f. Write up the stationery account in Ben’s ledger for the year ended 31
December 2017. Balance the account and bring down the balance on 1
January 2018.

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