Final Accounts – Accruals And Prepayments

ACCRUALS

The accrual concept states that revenue and expenditure of a period should be matched together – whether or not such revenue or expenditure had actually been received or paid for.

This means that items of expenditure or income shown in the final account should be for sums actually related to the period covered by the financial statements prepared in the final account.  Therefore statements such as the Trading and Profit and Loss Account should be prepared on the accruals, or matching basis so that expenses are matched to the revenue earned: that is, expenses are shown in the Profit and Loss Account as they have been incurred rather than as they have been paid. Similarly, incomes are shown in the Profit and Loss Account as they have been earned rather than as they have been received.

Accrual can be divided into

(a)        Accrued expenses

(b)        Accrued income (i.e income received in arrears)

ACCRUED EXPENSES: These are expenses which accrued but have not been paid for or

discharged.  They are also referred to as expenses owing or creditors for expenses e.g.

Accrued electricity.

EXPENSES: These are expenses like rent, insurance etc. which are paid in advance for subsequent period.  Only the expenses for the period must be charged to the Profit and Loss Account.  Therefore expenses paid in advance are deducted from total payments in line with the requirements of the matching concept.

INCOME RECEIVED IN ADVANCE: These are income received by the organization duringthe current period but which relate to the next (or subsequent) trading period e.g. rent received in advance.

EVALUATION

1.         Why is it necessary to make adjustments in the final accounts for accruals and prepayments?

2.         How will you account for the following when preparing the final accounts.

            (i)         Accrued Expenses

            (ii)        Prepayments

            (iii)       Rent Receivable Outstanding

b.         What accounting concepts underly your treatment of these items.

GENERAL EVALUATION

1. Explain the following : (a) bank loan (b) bank overdraft (c) standing order (d) credittransfer
2. List five source documents used in preparing the Cash Book.
3. List four accounts found in each of the following (a) nominal ledger (b) private ledger

(c) general ledger

4. Describe three features of each of the following financial statements: (a) Trading Account (b) Profit and Loss Account (c) Balance Sheet
5. State seven reasons for preparing a bank reconciliation statement.

READING ASSIGNMENT

Simplified and Amplified Financial Accounting, Page 185-202

WEEKEND ASSIGNMENT

1.         Prepayment is treated in the balance sheet of a firm as a ________

            (a) fixed asset              (b) long-term liability      (c) current asset     (d) current liability

2.         Rent prepaid as at 1^st January, 2002 was N10,000.  Annual rent payable is N80,000 and rent accrued as at 31^st December, 2002 was N15,000.  How much was paid for rent in 2002

            (a) N80,000        (b)  N75,000        (c) N55,000          (d) N35,000

3.         Resources consumed but to be paid for within the next accounting period are classified in the balance sheet as ________

            (a) current liabilities       (b)  current assets      (c) long-term liabilities     (d)  capital

Use the following information to answer questions 4 and 5

Rent receivable accrued   1/01/2005               D3,000

Rent received during the year 2005                D5,000

Rent receivable accrued 31/12/2005               D2,500

4.         The entry for rent received in the profit and loss account for the year ended 31^st December, 2005 is __________

            (a) Credit profit and loss account with D4,500    (b) Credit profit and loss account with D2,500   (c) debit profit and loss account with  D2,500     (d) debit profit and loss account with D4,500

5.       The balance in the rent receivable account as at 31/12/2005 is shown in the balance sheet as (a) fixed asset (b) current asset (c) current liability (d) long term liability

THEORY

Write up the ledger accounts of Adesua.  Enterprises for the year ended 31^st December, 2007.

(a)        Motor Expenses:

            Paid for the year to 31^st December 2007  N80,000;  Owing at 1^st January, 2007 N4000; Prepaid at 31^st December, 2007  N5,000

(b)       Rates:

            Paid in the year to 30^th June 2005 N4,500; Rates prepaid as at 30^th June 2004 N1000

            Rates owing at 30^th June 2005 N2,500

FINAL ACCOUNTS – FULLY WORKED EXERCISES