15/10/2012

The accruals concept

Income and expenses should be matched together and

dealt with in the income statement for the period to which they relate regardless of when the cash was actually paid or received. Examples:

Sales Purchases Cost of sales Expenses

Accrued Expenses
An accrued expense is an item of expense that has been

Accruals examples
Example 1 A business paid heating bills of 2700 for YE 30 Sep 2011. At the year end there was an unpaid bill of 600 covering the 3 months to 30 Nov 2011. What appears in the income statement under heating? Example 2 A business has paid the following electricity bills during the year to 31 Dec 2011: 28 Feb: For 2 months to 28 Feb 300 31 May: For 3 months to 31 May 540 31 Aug: For 3 months to 31 Aug 220 30 Nov: For 3 months to 30 Nov 360 The bill covering the 3 months to 28 Feb 2012 amounted to 360. what appears in the income statement for YE 2011 with respect to electricity?

incurred during the period but has not yet been paid for.
When the expenses for the period is more than the cash

paid during the period Amount paid plus the amount incurred (but not yet paid) at the end of the year will be shown in the income statement The amount incurred but unpaid represents an outstanding liability at the end of the year and will be included under the accrued expenses or accruals in the balance sheet
NOTE: In the next accounting period, this accrual will cease to be a liability and will become a payment in the cash flow statement of that period.

Prepayments (Prepaid expenses)

A prepaid expense is an item of expense that has been paid

during the current period but relates to the next accounting period.
When the amount paid during the period is more than full

Prepayments example
John pays insurance on his the machinery that he rents in advance. His payments for 2011 are:

expenses for the period

Amount paid for the accounting period will be shown in the

income statement at the end of the year

The amount paid in advance represents a current asset at the end of

1 Jan (for 3 months to 31 March 2011) 28 March (for 6 months to 30 Sep 2011) 2 Oct (for 6 months to 31 March 2012)

800 1800 1800

the year and will be included under the prepaid expenses or prepayments in the balance sheet
NOTE: In the next accounting period, this prepayment will cease to be an asset and will become an expense in the income statement of the period.

What is the insurance expense for the year ended Dec 2011?

15/10/2012

Limited company accounts

Are the same as sole trader accounts BUT: In the balance sheet: 1. Capital Share capital X Retained profit or loss X 2. No drawings for limited companies only dividends 3. Taxation appears as a current liability In the income statement: 1.Owners receive dividends which appear as an appropriation of profit in the income statement 2. Taxation is also an appropriation of profit

Statement of Financial Position

X Ltd: Statement of Financial Position as at 31 December Assets Non current assets X

Current Assets Inventories Receivables Bank TOTAL Assets Equity and Liabilities Current Liabilities Non current liabilities Share capital Retained profit and loss reserves

x x X x X

X X X X X

TOTAL Equity and liabilities

Income Statement Example

Sales Less: Cost of goods sold Gross Profit Operating expenses: Wages expenses Heat expense Total operating expenses Operating profit Dividends Taxation Net profit for the year

Income Statement for the year ended January 31 200X X (X) X

X X

(X) X (X) (X) X