Principles of Accounts

Balance Day Adjustment

-Revenue and expenses (Accruals & Prepayments)
 Topic & Structure of the lesson

 ACCRUALS

PREPAYMENTS

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 Learning Outcomes

 At the end of this topic, YOU should be able

to:
 Explain the conceptual foundation of accruals and
prepayments including the nature of the resulting charge to
the profit and loss account.

 Show entries for accruals and prepayments in the journal,

ledger, profit and loss account, and balance sheet

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 Key Terms you must be able to use

If you have mastered this topic, you should be able to use the following terms
correctly in your assignments and exams:

Accrued expenses, Accrued revenue (income), Prepaid Expenses,

Prepaid revenue

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 THE NATURE OF ACCRUALS

• The accruals concept dictates that costs are

recognized as they are incurred, not when money
is paid. That is, goods and services are deemed
to have been purchased on the date they are
received.
• This gives rise to accruals/accrued expenses
which are creditors in respect of services
received that have not been paid for at the end of
the accounting year.
• Accrued expenses arise where services are paid
for in arrear; eg electricity, gas, telephone calls.

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 THE COMPOSITION OF ACCRUALS

1. Invoices received (for expenses such as

purchases) that have not been paid at the end
of the accounting year or period.
2. The value of services (eg.,electricity) received
for which an invoice has not been rendered at
the end of the accounting year or period.
3.The latter requires an estimate to be made of
the amount of the services consumed during
the period between the date of the last invoice
and the end of the accounting year or period.

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 LEDGER ENTRIES FOR ACCRUALS

Dr Expense ( eg. Electricity) a/c $xxx

• as a balance carried down (c/d)
Cr Expense (Electricity Accrued) a/c $xxx
• as a balance brought down (b/d)

• The debit will thus be included in the charge to the

profit & loss account, and the credit shown as a
current liability on the balance sheet.
• The charge to the profit and loss account therefore
reflects the total value of the services
received/consumed during the accounting year.

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 THE NATURE AND COMPOSITION
OF PREPAYMENTS

• The accruals concept also gives rise to

prepayments/prepaid expenses which are debtors in
respect of services that have been paid for but not
received at the end of the accounting year.
• Prepaid expenses arise where services are paid for in
advance; eg rent, road tax, insurance.
• The amount is usually ascertained by determining on a
time basis how much of the last payment made during
the accounting year relates to services that will be
received in the following accounting year.

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 LEDGER ENTRIES FOR
PREPAYMENTS
Dr Expense (eg Rent) Prepaid a/c $xxx
• as a balance brought down (b/d)
Cr Expense (eg Rent) a/c $xxx
• as a balance carried down (c/d)

• The credit will thus reduce the amount paid that is

charged to the profit & loss account, and the debit
shown as a current asset on the balance sheet.
• The amount charged to the profit and loss account
therefore reflects the total value of the services
received/consumed during the accounting year.

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 Example 13.1 Accruals

• Leonardo has an accounting year ending on 31 December.

The following amounts have been paid for electricity:
Date paid Quarter ended $
29.3.05 28.2.05 (dec’04-Feb’05) 96
7.7.05 31.5.05 68
2.10.05 31.8.05 73
5.1.06 30.11.05 (Sep-Nov) 82
3.4.06 28.2.06(Dec’05-Feb’06) 99
Required: show the entries in the light and heat
account for the year ended 31.12.05 and BS extract.

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 Journal Entries & B/S Extract
• General Journal
31.12.04 Dr Light & Heat 32
Cr L&H accrued(1/3) 32
________________________________
29.3.05 Dr L&H accrued 32
L&H (2/3) 64
Cr Bank 96
___________________________________
7.7.05 Dr L&H 68
Cr Bank 68
___________________________________
2.10.05 Dr L&H 73
Cr Bank 73
______________________________________
31.12.05 Dr L&H (82+1/3xRM99)115
Cr L&H Accrued (Sep-Dec) 115
___________________________________________
L&H Expense = 64+68+73+82+33=320 B/S at 31 Dec 2005 (Extract)
Current Liabilities
L & H Accrued RM 115

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 Example 13.2 Prepayments

• Mr.Incredible has an accounting year ending 30

June. The following amounts have been paid as
rent: 1 Jul 04- 30 June 05
Date paid Quarter ended $
2.6.05 31.8.05(Jun-Aug) 600
7.7.05 30.11.05 600
2.10.05 28.2.06 660
5.1.06 31.5.06 660
3.4.06 31.8.06(Jun- Aug) 720
Required: show the entries in the rent account for
the year ended 30.6.06 balance sheet extract.
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 Journal Entries & B/S Extract
• Journal Entries
2.6.05 Dr Rent (1/3) 200
Rent Prepaid(2/3) 400
Cr Bank 600
_________________________________
1.7.05 Dr Rent 400
Cr Rent Prepaid 400
_________________________________
7.7.05 Dr Rent 600
Cr Bank 600
______________________________
2.10.05 Dr Rent 660
Cr Bank 660
___________________________________
5.1.06 Dr Rent 660
Cr Bank 660
___________________________________
3.4.06 Dr Rent (1/3) 240
Rent Prepaid (2/3 ) 480
Cr Bank 720
_____________________________________
Rent expense for y.e.30.6.06 B/S at 30 June 2006
= 400+600+660+660+240 Current Assets
= 2,560 Rent Prepaid 480

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 Example 13.3

• The following details are available:

1. on 31.12.04, 3 months’ rent amounting to a
total of $3,000 was owing.
2. The rent chargeable per year was $12,000.
3. The following rent payments were made in the
year 2005: 6.1. $3,000; 4.4. $3,000; 7.7.
$3,000; 18.10. $3,000.
4. The final 3 months’ rent for 2005 is still owing.

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 Journal Entries
• General Journal
31.12.04 Dr Rent 3,000
Cr Rent Accrued 3,000
__________________________________
6.1.05 Dr Rent Accrued 3,000
Cr Bank 3,000
_____________________________________
4.4.05 Dr Rent 3,000
Cr Bank 3,000
_________________________________________
7.7.05 Dr Rent 3,000
Cr Bank 3,000
______________________________________________-
18.10.05 Dr Rent 3,000
Cr Bank 3,000
____________________________________________________
31.12.05 Dr Rent 3,000
Cr Rent Accrued 3,000
__________________________________________________________

Total Rent expense for year ended 31.12.2005 = 3,000 + 3,000 +3,000 +3,000 = 12,000

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 Example 13.4

The following details are available:

1. On 31.12.04, packing materials in hand
amounted to $1,850.
2. During the year to 31.12.05, we paid $27,480
for packing materials.
3. There were no stocks of packing materials on
31.12.05.
4. On 31.12.05, we still owed $2,750 for packing
materials already received and used.

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 Calculation of packing materials
purchased & accrual
• Journal Entries
31.12.05
Dr Packing materials 27,480
Cr Bank 27.480
_____________________________
Dr Packing materials 2,750
Packing mats. Accrued 2,750
________________________________
Total packing materials purchased for2005
= 27,480 + 2,750 = 30,230

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 Example 13.5
[Combined Accounts]

Details for year ended 31.12.05.

1. Rent is payable of $6,000 per annum.
2. Rates of $4,000 per annum are payable by
installments.
3. At 1.1.05, rent of $1,000 had been prepaid in
2004.
4. On 1.1.05, rates of $400 were owed.
5. During 2005, rent of $4,500 was paid.
6. During 2005, rates of $5,000 were paid.
7. On 31.12. 05, rent of $500 was owing.
8. On 31.12.05, rates of $600 had been prepaid.
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 Combined A/c 0f Rent & Rates

Rent & Rates A/c

2005 2005
Jan1 Bal b/d 1,000 Jan 1 Bal b/d 400
Dec31Bank 4,500 Dec31 P&L 10,000
Bank 5,000 Bal c/d 600
Bal c/d 500 ______
11,000 11,000
Profit & Loss A/c
For Year Ended 31 December 2005
Expenses :
Rent 6,000
Rates 4,000

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 Example 13.6

The financial year of ET ended on 31.12.06. Show the

ledger accounts for the following items including the
balance transferred to the necessary part of the
financial statements, also balances carried down to
2007:
1. Motor expenses: Paid in 2006 $819; Owing at
31.12.06 $94.
2. Insurance: Paid in 2006 $840; Prepaid as at
31.12.06 $68.
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 Ledger Accounts

Motor Expenses A/c

2006 2006
Dec31Bank 819 Dec 31 P&L 913
ME Accrued 94 ___
913 913
Insurance A/c
2006 2006
Dec31Bank 840 Dec 31 Ins.Prepaid 68
___ P&L 772
840 840

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 P&L A/c and B/S (Extract)

Profit & Loss A/c (Extract)

For Year Ended 31 December 2006
Expenses
Motor expense 913
Insurance 772
Balance Sheet (Extract)
As At 31 December 2006
Current Assets Current Liabilities
Insurance prepaid 68 M.E. accrued 94

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 Example 13.6 (cont’d)

3. Stationery: Paid in 2006 $370; Owing as at

31.12. 05 $110; Owing as at 31.12.06 $245.

4. Business rates: Paid during 2006 $1,654;

Prepaid as at 31.12.05 $140; Prepaid as at
31.12.06 $120.

5. ET sub-lets part of the premises. He receives $1,400

during the year ended 31.12.06. Hargreaves, the
tenant, owed ET $175 on 31.12.05 and $185 on
31.12.06.
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 Ledger Accounts
Stationery A/c
2006 2006
Dec 31 Bank 370 Jan 1 Stationery accrued 110
Stat.accrued 245 Dec31P&L 505
615 615
Business Rates A/c
2006 2006
Jan 1 Bus. rates Dec31 Bus. rates
prepaid 140 prepaid 120
Dec31 Bank 1,654 P&L 1,674
1,794 1,794

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 Ledger Accounts
Journal entries :
31.12.2005 Dr Rent receivable 175
Cr Rent income 175
______________________________________________________
31.12.2006 Dr Bank 1,400
Cr Rent receivable 175
Rent income 1,225
_____________________________________________________
Rent Income A/c
2006 2006
Dec31 P&L 1,410 Dec31 Bank 1,225
_____ Rent receivable 185
1,410 1,410

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 Question and Answer Session

Q&A

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 Next Session

• Final Accounts with adjustments.

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