Embed Size (px)
DESCRIPTION
Assume the Position. ACT 1100 Introduction to Accounting . Summer Course. Lecturer: Troy J. Wishart. Our Confession. ACT 1100 Is EASY POP!. Because, My Belief Determines my Destination. Lecture Notes 4. Accruals and Prepayments. Accruals & Prepayments. Introduction - PowerPoint PPT Presentation
Citation preview
Assume the Position
ACT 1100Introduction
to Accounting
Lecturer: Troy J. Wishart
Summer Course
ACT 1100Is EASY
POP!
Our Confession
Because, My Belief Determines my Destination
Accruals and Prepayments
Lecture Notes 4
Accruals & PrepaymentsIntroduction• Accrual Concept - Revenue and
Expenses are accrued, that is recognized as they are earned or incurred (and not as money is received or paid),…
Accruals & PrepaymentsIntroduction• Therefore Expenses are charged to the
period in which they are incurred, that is when the benefit would have been obtained by business, whether cash is paid or not.
Accruals & PrepaymentsIntroduction• Accruals and prepayments are like
creditors and debtors, except that there is no invoice awaiting payment.
Accruals & PrepaymentsIntroduction• Common examples of prepayments are
Rent, Rates, Insurance And Road Tax
• paid for in advance,
Accruals & PrepaymentsIntroduction• Common examples of accruals are
Electricity, Gas and Telephone
• Which are paid in arrears
Accruals & PrepaymentsIntroduction• Accruals are liabilities and usually have
a credit balance• Prepayments are Assets and usually
have a debit balance
Accruals & PrepaymentsIntroduction• There can be:
Accrued Expense Prepaid Expense Accrued Income Prepaid Income
Accruals & PrepaymentsIntroduction There is difference between...
INCURRED PAID
EXPENSES
Accruals & PrepaymentsIntroduction There is difference between...
EARNED RECEIVED
REVENUE
Accruals & PrepaymentsIntroduction Expenses are therefore, time related,
and are charged to the period to which they relate. Accruals and
prepayments are determined at the end of the financial period
under review.
Accruals & PrepaymentsAccrued Expenses• An expense that the firm has used, but
which has not yet been paid for.
Double EntryAccruals are debited to the expense account so as to increase it and credited to the accrual account.
Accruals & PrepaymentsAccrued Expenses
If an expense is incurred in one period, that is
the benefit was obtained
but paid for in a future
period
the transaction must be reported in
the period that it was incurred and
not the period that it was paid.
Accruals & PrepaymentsAccrued Expenses – Example• Assume that rent of $300,000 per year is payable at
$75,000 at the end of every three months. The rent was not always paid on time. Details were as follows:
Amount Rent Due Rent Paid$75,000$75,000$75,000$75,000
March 31, 2011June 30, 2011
September 30, 2011December 31, 2011
March 31, 2011July 2, 2011
October 4, 2011January 5, 2012
Accruals & PrepaymentsAccrued Expenses – Example• The rent account for the Year ended December 31, 2011
is as follows:
2011
2012
2011
2012
Rent Account
Mar 31July 2Oct 4Dec 31
BankBankBankAccrued Balance (c/d)
75,00075,00075,000
75,000
Dec 31 Profit and Loss A/c 300,000
300,000 300,000Accrued Bal b/d 75,000Jan 175,000BankJan 6
Accruals & PrepaymentsPrepaid Expenses• An expense to be used up in a
following period, but which has been paid for in advance.
Double EntryPrepayments are credited to the expense account to reduce it and debited to the prepayment account.
Accruals & PrepaymentsPrepaid Expenses
If an expense is paid for in one
period for a future period
it is not related to the
period in which it was
paid
It must be charged to the future period.
Accruals & PrepaymentsPrepaid Expenses• Such a transaction would require a
transfer from the period in which it was paid to the period it is related to.
Accruals & PrepaymentsPrepaid Expenses – Example• Insurance for a firm is at the rate of 120,000 a year,
starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows:
Amount Insurance Due Insurance Paid$30,000$30,000$30,000$30,000
March 31, 2011June 30, 2011September 30, 2011December 31, 2011
February 28, 2011 – $30,000
August 31, 2011 - $60,000November 18, 2011 -$60,000
Accruals & PrepaymentsPrepaid Expenses – Example• The insurance account for the Year ended December 31,
2011 is as follows:
2011 2011
Insurance Account
Feb 28Aug 31Nov 18
Dec 31
BankBankBank
Prepaid Balance (c/d)
30,00060,00060,000 30,000
Dec 31 Profit and Loss A/c 120,000
150,000 150,000Prepaid Bal b/d 30,000Jan 1
Opening and Closing Accruals and Prepayments
Lecture Notes 4
Accruals & PrepaymentsOpening and Closing Prepaid Expenses –MODEL
2011 2011
Expense Account
Jan 1
Dec 31
Prepaid Bal b/d
Accrued Bal c/d Prepaid Bal. (c/d)
00,000
00,000
Dec 31 Profit and Loss A/c 00,000
000,000 000,000
Dec 31
Accrued Bal b/dJan 1 00,000
00,000
Payments 00,000
Accruals & PrepaymentsOpening and Closing Accrued Expenses – Example• Assume that rent of $300,000 per year is payable at
$75,000 at the end of every three months. The rent was not always paid on time. Details were as follows:
Amount Rent Due Rent Paid$75,000$75,000$75,000$75,000$75,000
December 31, 2010March 31, 2011June 30, 2011September 30, 2011December 31, 2011
March 31, 2011 - $150,000July 2, 2011 – $75,000October 4, 2011 – $75,000January 5, 2012 – $75,000
Accruals & PrepaymentsOpening and Closing Accrued Expenses• The rent account for the Year ended December 31, 2011
is as follows:
2011
2012
2011
2012
Rent Account
Mar 31July 2Oct 4Dec 31
BankBankBankAccrued Balance (c/d)
150,00075,00075,000
75,000
Dec 31 Profit and Loss A/c75,000
375,000 375,000Accrued Bal b/d 75,000Jan 1
Accrued Bal b/d Jan 1300,000
75,000BankJan 6
Accruals & PrepaymentsPrepaid Expenses – Example• Insurance for a firm is at the rate of 120,000 a year,
starting January 1, 2011. The firm has agreed to pay the premium at the rate of $30,000 every three months. However payments were not made at the correct times. Details were as follows:
Amount Insurance Due Insurance Paid$30,000$30,000$30,000$30,000
March 31, 2011June 30, 2011September 30, 2011December 31, 2011
December 31, 2010 -$30,000February 28, 2011 – $30,000August 31, 2011 - $60,000November 18, 2011 -$30,000
Accruals & PrepaymentsOpening and Closing Prepaid Expenses – Example• The insurance account for the Year ended December 31,
2011 is as follows:
2011 2011
Insurance Account
Jan 1
Aug 31Nov 18
Dec 31
Prepaid Bal b/d
BankBank
Prepaid Balance (c/d)
30,000
60,00030,000
30,000
Dec 31 Profit and Loss A/c 120,000
150,000 150,000Prepaid Bal b/d 30,000Jan 1
Feb 28 Bank 30,000
Accrued IncomeLecture Notes 4
Accruals & PrepaymentsAccrued Income – Example• Our warehouse is lager than we need. We rent part of it
to another firm for $60,000 per annum. Details for the year ended December 31 were as follows:
Amount Rent Due Rent Received
$15,000$15,000$15,000$15,000
March 31, 2011June 30, 2011September 30, 2011December 31, 2011
April 4, 2011 - $15,000July 6, 2011 – $15,000October 9, 2011 - $15,000January 7, 2012 -$15,000
Accruals & PrepaymentsAccrued Income• The Rent Income account for the Year ended December
31, 2011 is as follows:
2011
2012
2011
2012
Rent Income Account
April 4
Oct 9Dec 31
Cash
CashAccrued Balance (c/d)
15,000
15,000
15,000
Dec 31 Profit & Loss A/c 60,000
60,000 60,000Accrued Bal b/d 15,000Jan 1
July 6 Cash 15,000
Cash 15,000Jan 7
ACT 110Is EASY
POP!
Our Confession
Because, Passion is my Fuel
