Explain the foundations of accruals and prepayments, including the nature of the resulting change in the income statement. | |Show the entries for accruals and prepayments in the journal, ledger and final accounts. | |Prepare the final accounts from a trial balance making the required adjustment for accruals and prepayments.
The Accrual Concepts The accruals concept dictates that costs are recognized as they are incurred, not when money is paid. An accrual is an amount outstanding for a service provided during a particular accounting period that is still to be paid for at the end of it. It is expected that the amount due will be settled in cash in a subsequent accounting period. The term accrued expenses refer to an expense that the business has incurred but has not yet paid yet. Normally the accountant waits till the end of period to make an adjustment before the financial statement is prepared.
Prepayment = paid in advance 2. Income statement = the expense paid LESS the prepaid amount 3. Balance sheet = the prepaid amount is shown as current assets Example 3 Insurance for a business is at the rate of RM 1,840 per annum, starting from 1 January 2012. The business has agreed to pay this rate of RM 460 every quarterly.
