ACCRUALS

1
ACCRUALS PREPAYMENTS

• PLUS OTHER ADJUSTMENTS

2
THE ACCRUALS CONCEPT

• In your notes for week 1, the accruals concept
  was outlined
• When a profit statement is prepared, the cost of
  goods sold should be matched with the revenue
  from their sale (i.e. Sales). Similarly, other
  revenues and expenses should be matched up so
  that they relate to the time period for which the
  profit statement is being prepared.

3
THE ACCRUALS CONCEPT

• REVENUES AND COST SHOULD BE RECOGNISED AS THEY
  ARE EARNED OR INCURRED, NOT WHEN THE CASH
  TRANSACTION TAKES PLACE.

4
ACCRUED EXPENSES

• Assume that a business must pay an annual rent of
  1,000.
• The rent is due for payment at the end of each
  calendar quarter, i.e. 31 March, 30 June, 30
  September and 31 December.
• The business prepares financial statements each
  year at 31 December.

5
ACCRUED EXPENSES

• During the year to 31 December 2005 the company
  made the following cash payments
• 31 March 2005 250
• 02 July 2005 250
• 04 October 2005 250

6
ACCRUED EXPENSES

• The Rent Payable Account would appear as follows
• Rent Payable A/c
• 31/03/05 Cash 250
• 02/07/05 Cash 250
• 04/10/05 Cash 250

7
ACCRUED EXPENSES

• The rent due for payment on 31 December 2005, was
  not actually paid until 05 January 2006.
• If we closed-off this account at 31 December
  2005, how much would be transferred to the profit
  and loss account as an expense?
• Is this the actual cost incurred for the year to
  31 December 2005?

8
ACCRUED EXPENSES

• In order to insure that the correct cost of rent
  for the year is recognised (shown or charged) in
  the profit and loss account, it is necessary to
  make an adjustment, known as an accrual, which is
  in essence a liability of the business.

9
ACCRUED EXPENSES

• Rent Payable A/c
• 31/03/05 Cash 250
• 02/07/05 Cash 250
• 04/10/05 Cash 250
• 31/12/05 Accrued c/d 250
• 31/12/05 P L A/c 1,000
• 1,000 1,000
• 01/01/06 Bal b/d 250

10
PREPAID EXPENSES

• What would happen if the following payments had
  been made during the year?
• 31 March 2005 250
• 02 July 2005 250
• 04 October 2005 250
• 05 November 2005 250
• 20 December 2005 250

11
PREPAID EXPENSES

• The Rent Payable Account would then appear as
  follows
• Rent Payable A/c
• 31/03/05 Cash 250
• 02/07/05 Cash 250
• 04/10/05 Cash 250
• 05/11/05 Cash 250
• 20/12/05 Cash 250

12
PREPAID EXPENSES

• In this example the rent has been paid in advance
  of when it was due.
• If we closed-off this account at 31 December
  2005, how much would be transferred to the profit
  and loss account as an expense?
• Is this the actual cost incurred for the year to
  31 December 2005?

13
ACCRUED EXPENSES

• In order to insure that the correct cost of rent
  for the year is recognised (shown or charged) in
  the profit and loss account, it is necessary to
  make an adjustment, known as a prepayment, which
  is in essence an asset of the business.

14
PREPAID EXPENSES

• Rent Payable A/c
• 31/03/05 Cash 250
• 02/07/05 Cash 250
• 04/10/05 Cash 250
• 05/11/05 Cash 250
• 20/12/05 Cash 250
• 31/12/05 P L A/c 1,000
• 31/12/05 Prepaid c/d 250
• 1,250 1,250
• 01/01/06 Bal b/d 250

15
REVENUES

• Similar situations may arise with other revenues
  (REMEMBER, revenue for sales is already shown in
  the books of account, i.e. debtors).
• You should study pages 292 and 293 of your text
  to learn how these are treated.
• In essence they are mirror images of the
  treatment of expenses.

16
ACCRUALS PREPAYMENTS IN THE BALANCE SHEET

• In all cases listed dealing with adjustments in
  the financial statements, there will still be a
  balance on each account after the preparation of
  the profit and loss account.
• All such balances should appear in the balance
  sheet, indicated by the terms accruals,
  prepayments or accrued income, depending upon
  their nature.
• These items will either be included under the
  headings current liabilities or current assets.

17
GOODS FOR OWN USE

• We have already seen that if the owner takes
  goods for his own use, these should be considered
  as drawings.
• Similarly, any personal expenses of the owner,
  for example the payment of the owners private
  telephone bill by the business, should also be
  treated as drawings.

18
Q28.2A

• J. Owens year ended on 30 June 2008. Write up
  the ledger accounts, showing the transfers to the
  financial statements and the balances brought
  down to the next year for the following

19
Q28.2A

• Stationery Paid for the year to 30 June 2008
  855 Stocks of stationery at 30 June 2007 290
  at 30 June 2008 345.
• General expenses Paid for the year to 30 June
  2008 590 Owing 30 June 2007 64 Owing at 30
  June 2008 90.

20
Q28.2A

• c) Rent Rates (combined account) Paid in the
  year to 30 June 2008 3,890 Rent owing at 30
  June 2007 160 Rent paid in advance at 30 June
  2008 250 Rates owing at 30 June 2007 205
  Rates owing 30 June 2008 360.

21
Q28.2A

• Motor expenses Paid in the year to 30 June 2008
  4,750 Owing as at 30 June 2007 180 Owing as
  at 30 June 2008 375.
• Owen earns commission from the sales of one item.
  Received for the year to 30 June 2008 850
  Owing at 30 June 2007 80 Owing at 30 June 2008
  2008 145.

22
Q28.2A

• Stationery A/c
• Bal b/d 290
• PL A/c 800
• Bank/Cash 855
• Bal c/d 345
• 1,145 1,145
• Bal b/d 345

23
Q28.2A

• General Expenses
• Bal b/d 64
• PL A/c 616
• Bank/Cash 590
• Bal c/d 90
• 680 680
• Bal b/d 90

24
Q28.2A

• Rent Rates A/c
• Bal b/d 160
• Bal b/d 205
• PL A/c 3,635
• Bank/Cash 3,890
• Bal c/d 360
• Bal c/d 250
• 4,250 4,250
• Bal b/d 250 Bal b/d 360

25
Q28.2A

• Motor Expenses
• Bal b/d 180
• PL A/c 4,945
• Bank/Cash 4,750
• Bal c/d 375
• 5,125 5,125
• Bal b/d 375

26
Q28.2A

• Commissions Receivable A/c
• Bal b/d 80
• Bank/Cash 850
• PL A/c 915
• Bal c/d 145
• 995 995
• Bal b/d 145