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A Level Accounting
Accruals and Prepayments
| Question | Answer |
|---|---|
| Define an Accrual | An accrual is a liability for services that have already been used but that have not yet been invoiced to the business e.g. electricity bills that have not yet been paid |
| Explain how to calculate an Accrued Expense | (1) Calculate monthly amount x (2) Number of months that have been accrued = (3) Add this amount to the relevant expense |
| The Trial Balance for the year ended 31 July 2017 includes £2 100 for Insurance. An invoice for insurance £960 covering 12 months ended 31st December 2017 has yet to be recorded. How would this be calculated? | (1) £960/12 = £80 monthly amount (2)The number of months that have been accrued amounts to 7 (Jan 2017 to July 2017) (3) £80 x 7 = £560 amount to be added to relevant expense which is the insurance of £2 100. The amount would be £2 100 + £560 = £2 660 |
| Describe the effects on Accounts of the Accruals of expenses | (1) Cr Current Liabilities (other payables will increase) (2) Dr the relevant Expenses Account (Wages/Rent/Electricity) |
| Define a prepayment | A prepayment arises when an expense is paid in advance and all or part of the payment relates to the next accounting period e.g. rates/water/electricity |
| Describe how prepayments are calculated | (1) Calculate monthly amount x (2) Number of months that have been prepaid = (3) Then subtract this amount from the relevant expense |
| State the effect on Accounts of Prepayments of Expenses | (1)Dr Current Assets (other Receivables increases) (2) Cr the relevant Expenses Account (Wages/Rent/Electricity) as expenses down |
| Define a prepayment of Income | If a tenant pays their rent/commission in advance, then this is Prepayment of Income |
| Describe the effect on Accounts of Prepayments of Income | (1) Cr Current Liabilities (Creditors) will increase (Income received in advance so the business owes money) (2) Dr Rent/Commission Received Account |
| How would this be dealt with in the Final Accounts (Balance Sheet and Profit and Loss); Rent received in advance £260. | (1) Cr Current Liabilities £260 (Creditors up) (2) Dr Rent Received Account by £260 (Sales/income down) |
| Define Accrual of Income | Accrual of Income is an amount due to the business during an accounting period but not received at the end of that period e.g. commission/rent |
| Describe the effect on Accounts of Accrued Income | (1) Cr the Income Account e.g. Commission/Rent Received Account (Revenue up) (2) Dr Current Assets (Debtors up) |
| How would this be dealt with in the Final Accounts ; Commission due but not yet received £135 | (1) Dr Current Assets £135 (other receivables up) (2) Cr Commission Received Account £135 (Revenue up even though not yet received) |
| Commission Received is £1 200. However, only £1 000 has been given. How would this (Accrued Income Question) be dealt with in the Accounts | (1) Dr Bank £1 000 as Cash up (Assets). (2) Cr Commission Received Account £1 000 (Revenue up). (3)Cr £200 Accrued Income in the Commission Received Account (Revenue up even though not received) (4) Dr £200 Current Assets (Debtors/Assets up) |
| Rent Received is £3 000 for the year. However, only £2 400 is for this accounting period. How would this (Prepaid Income Question) be dealt with in the Accounts | (1) Dr Bank £3000 (Cash up) (2) Cr Rent Received Account £3000 (Sales up) (3) Cr Current Liabilities £600 (Creditors up) (4) Dr Rent Received Account £600 |
| Rent Received in advance £260. How would this be dealt with in the accounts? | (1) Dr Rent Received Account £260 (2) Cr Current liabilities £260 (Creditors up) |
| Prepayments postage £110. How would this be dealt with in the accounts? | (1) Dr Current Assets £110 (Debtors up) (2) Cr Postage Account £110 (Expenses down) |
| Accrued expenses Wages £185. How would this be dealt with in the accounts? | (1) Cr Current Liabilities £185 (Creditors up) (2) Dr Wages Account £185 (Expenses up) |
Created by:
durquhart1
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