Comments

  1. avatar says

    Hi John,

    With regards to Test Q1, the answer suggests that we should include the interest chargeable on the loan as an asset for the year ending 31.12.08. Isn’t it fair to say that the interest has not yet been realised, and as such, the company has not actually earned any income yet (and so should not be a current asset)?

    OR, do we consider the interest as a Receivable not yet paid (entailing it’s a current asset)?

    Cheers!

    • Avatar of johnmoffat says

      We must always account of all income earned and all expenses incurred, whether or not we have received or paid cash.

      Here, we have earned the interest (because they had the loan for 12 months) and so the income must appear in the Statement of Profit or Loss.
      Since they have not yet paid us the money, the amount owing will appear as a receivable in the Statement of financial position.

  2. avatar says

    When we pay the accrued expense of 950, why don’t we just Dr Accruals & Cr Cash? Why we need to Dr & Cr the telephone expense a/c again, as we have already recorded the expense in the previous year.

    • Avatar of johnmoffat says

      We could, but it would make things more complicated and confusing.

      Let me give you just one example of the problem it would create.
      Suppose our year end is 30 November, and we pay electricity in arrears for 3 months to end Mar, to end June, to end Sept, and to end Dec.

      At 30 November we would need to accrue for 2 months – oct and nov. But the first payment in the next year would be for October, nov, and dec.
      doing it your way we would have to split the payment with part debited to accruals and part debited to electricity.

      Since we only need to worry about accruals and prepayments once a year it is far easier to always debit the payments to the expense account, and at the end of each year to make the entries for the accruals and prepayments.

  3. avatar says

    Total rent received during year ended 30 April 2008: $ 1154880
    Less: Rent received in advance for year ended 30 April 2009: – $ 74880
    Add: Rent for year ended 30 Apr 2008 received as advance
    in year ended 30 Apr 2007 + $ 68880
    Less: Rent for year ended 30 Apr 2007 received in arrears
    in year ended 30 Apr 2008 – $ 50880
    Add: Rent for year ended 30 Apr 2008 which will be received
    in year ended 30 Apr 2009 + $ 44160

    Total Rental income for the year ended 30 Apr 2008 = $ 1142160

    I have assumed that rent to be received in arrears ($ 44160) on 30 Apr 2008 is an income for year ended 30 Apr 2008 in SOPOL and will be a receivable in balance sheet.

    Is this correct?

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