That there are two common ways to prepare accruals and prepayments.

7 That there are two common ways to prepare accruals and prepayments.

Part 4 l Adjustments for financial statements

Answers to activities

28.1 Don’t worry if you didn’t know what names to give the accounts other than the rent account. What is important is that you thought about it and that you knew which side the entries should

be in the rent account. (a) Dr Rent account £200

Cr Accruals account £200

(b) Dr Prepayments account £100

Cr Rent account £100

Note how the two entries in the rent account are on opposite sides. The £200 rent owing at the end of the year is an expense that has not yet been entered in the books, but it must be as it relates to the current year. The £100 paid in advance for next year is not an expense of the current year, so you need to reduce the amount you have currently in the rent account so that the correct expense will be posted to the profit and loss account. The accruals account is similar to a creditor’s account, but it is used for expenses unpaid at the year end. Similarly, the prepayments account is like a debtors account, but it is used to record amounts paid for expenses in advance of the accounting period in which the benefit (i.e. what was paid for) is received.

28.2 All the debit entries should be added together and shown as one entry called ‘prepayments’ within current assets. Similarly, all the credit entries should be added together and shown as one entry called ‘accruals’ under current liabilities. This is done so as to minimise the clutter in the bal- ance sheet while providing enough information for anyone looking at the financial statement to

be able to identify the figure for accruals and the figure for prepayments.

28.3 (a) between debtors and bank (b) between creditors and bank overdraft (c) their degree of liquidity.

28.4 They are usually added to debtors. This is because these represent a regular source of income and, even though the income has nothing to do with the goods or services that form the main activity of the business, they are in every other sense another form of customer account. It makes sense, therefore, to include them in the debtor balance shown in the balance sheet.

£ Rates due during the year

4,000 Add: Rates accrued at the start of the year

400 4,400 Less: Rates paid during the year

(5,000) Rates prepaid at the end of the year

Review questions

28.1 The financial year of T Guiness ended on 31 December 20X6. Show the ledger accounts for

the following items including the balance transferred to the necessary part of the financial state- ments, also the balances carried down to 20X7:

(a) Motor expenses: Paid in 20X6 £819; Owing at 31 December 20X6 £94. (b) Insurance: Paid in 20X6 £840; Prepaid as at 31 December 20X6 £68. (c) Stationery: Paid during 20X6 £370; Owing as at 31 December 20X5 £110; Owing as at

31 December 20X6 £245. (d) Business rates: Paid during 20X6 £1,654; Prepaid as at 31 December 20X5 £140; Prepaid as at

31 December 20X6 £120. (e) Guiness sub-lets part of the premises. He receives £1,400 during the year ended 31 December 20X6.

Harte, the tenant, owed Guiness £175 on 31 December 20X5 and £185 on 31 December 20X6. 28.2A W Hope’s year ended on 30 June 20X8. Write up the ledger accounts, showing the transfers

to the financial statements and the balances carried down to the next year for the following:

Chapter 28 l Accruals and prepayments and other adjustments for financial statements

(a) Stationery: Paid for the year to 30 June 20X8 £240; Stocks of stationery at 30 June 20X7 £60; at 30 June 20X8 £95. (b) General expenses: Paid for the year to 30 June 20X8 £470; Owing at 30 June 20X7 £32; Owing at 30 June 20X8 £60. (c) Rent and business rates (combined account): Paid in the year to 30 June 20X8 £5,410; Rent owing at 30 June 20X7 £220; Rent paid in advance at 30 June 20X8 £370; Business rates owing 30 June 20X7 £191; Business rates owing 30 June 20X8 £393. (d) Motor expenses: Paid in the year to 30 June 20X8 £1,410; Owing as at 30 June 20X7 £92; Owing as at 30 June 20X8 £67. (e) Hope earns commission from the sales of one item. Received for the year to 30 June 20X8 £1,100; Owing at 30 June 20X7 £50; Owing at 30 June 20X8 £82.