# Accruals and Prepayments Example 2

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cant understand the workings of any of the test questions!!!!! help me pls!!!

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We have to calculate for the year 2006 so we rule out the first bill as it doesn’t include year 2006. Second bill we take 2/3rd of the bill as we include only Jan and Feb for calculating this years bill, then full amounts of the next three bills as it includes these three months, then finally 1/3rd of the bill as it includes one month December for the year 2006 and rest is prepayment.
(2/3rd of 798 ) 532+ 898.8 +814.8 + 840+ (1/3 of 966) 322 = \$3407.6

1. says

Can someone please explain Test Question 1? Why do we include the whole of 9600 in current year’s SOFP?

• says

Because it is an accrued expense.. and accruals are included into current liabilities.. hope i helped!

2. says

sir please verify \$20 which are added in th end by alternating the t-a/c can this happen in real ??or can we add these 20\$ dollar in the start rather than adding by changing in the end??

3. says

Thanks to opentuition.for many expamples on accruals and prepayments Im now able to understand the concept.

4. says

Thanks for the Amit example. This is the case when we did not receive the invoice. Please could someone explain to me if for instance the financial year ends on 30th June 2011 and I have insurance bill running from May 2011 to April 2012 of \$ 1,200. The invoice is due for payment in advance. The insurance company has already issued me the invoice when I was closing my books in June 2011 but I have not paid the invoice. I expect to pay the invoice in the next financial year beginning July 2012. What would be the treatment in the Income statement and the Statement of finacial position for this invoice under accrual accounting?

5. says

Thanks, it’s very good.
But I don’t understand – you can’t just cross out things in the T accounts and change the numbers that have been there, there has to be some system by which to make amendments or fix errors. What is the process?
(I mean the 20\$ that he added because the phone expense for the previous year was \$20 more than his estimate. He can’t just cross out all the workngs so far and just change the number!!!???)
Thanks.

• says

@malkyrox, the crossing out was to explain why it didn’t matter that the accrual last year turned out to be wrong.
And of course you can cross out your workings – in Paper F2 your workings are not looked at!

• says

I meant that in real life it can’t be just crossed out – so how would you account for this change in real life book-keeping?
i understand what it’s meant to show, but how would you record this extra \$20 in the ledger accounts?

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@malkyrox, You record the amount that is actually paid, when it is paid. If the accrual at the end of the previous year was wrong, then you do not change it. It simply means that the charge in the income statement this year takes into account the fact that the opening accrual turned out to be wrong.

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@johnmoffat, and thanks for all your videos, they are helping me tremendously and every time I meet someone who learns accounting I recommend them this site…
Thanks!

• says

videos are great but the answers to the tests are not very helpfull – they dont show workings… or how to attempt questions… anyone got any advise on this..

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@msoph, download the notes or view online for F3(opentuition), and scroll down to page number 175 & 176 where you will find out exact answers to the questions 1, 2, 3, 4. this is how your working/solutions in the exams would be.
And it has answers to all other examples in the notes.
Hope it helps.

6. says

Strugling with Test Q3:
Anyone who can help explain the rationale behind (I have looked at answer, but still not sure I get it)

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@martinras, You start by inserting the prepayments and accruals, both brought down and both carried forward.
Rent
_____________________________________________________
Accrual b/d 50880 l Prepayment b/d 68880

The carried forward entries must be now on the opposite side.

So

bal c/f 74880 l balance c/f 44160

Since you are receiving the cash because this is rent payable to yourself you must debit your cash and credit the rent account.

and then you must find the missing figure on the left which will be the rental charge for the year. Hope this helps

7. says

i am trying to watch f3 videos but every time i do so i get the message: video not found.i use Firefox 9 and the latest flash player on a win 7 Toshiba laptop. what could be my problem?

8. says

a company has contracted ists insures in respect of fraud committed by an employess, the company is insured for theft but the insurance company maintains that the nautre of the fraud committed is commerial and is not covered by the policy. the company has not yet received an opinion from its attorney…
How should this be treated under IAS 37

9. Great lecture on Accruals. Thank you

One question however.
It seemed like the accrual (e.g. Amit’s \$950) in into the Income Statement for Y/E 31 Mar 2001 (example 2), and then again as the actual expense into the Income Statement for Y/E 31 March 2002 (example 4).
Shouldn’t you only record the expense once on the Income Statement when it was accrued, not when the bill got paid? Surely the actual expense would go into the next year’s cash flow?

Thanks

10. says

To: Mustaffaacca
Sorry Mustafe the above explanation is for F3 chapter 4 Q4 your problem is for Q5 let me try it once again.

For Income Statement amount
The Questions Says Premium for year ended 31 March 2008 that
means a year from 1 April 2007 to 31 March 2008 within that year we have to spend \$ 25920 if you look down the question it says calculate income statement amount for the year ended 30 June 2008 that means a Year runnig from 1 July 2007 to 30 June 2008
so we have Paid the 25920 in April 2007 that is three months before our accounting period starts that means three months belong to previous accounting year so we have to just calculate 9 months in our accounting year that is from 1 July 2007 to 31 March 2008 in calculate it wil be 9/12* 25920= \$ 19440
so now we are in 1 April 2008 that is three month to go to our accounting year of 30 June 2008. the questions says the Second Payment is April 2008 so Only three month belong to our accounting Period and we will calculate it like this 3/12*28800= \$7200
when you ad \$19440+\$7200= \$26640 and this the amount that will the income statement as an expense for 30 June 2008

For the Statement of Financial Position amount
the Prepayment will be the amount Paid in April 2008 less the three months that belong to our accounting period of 30 June 2008
in calculation it will be like this \$28800-\$7200= \$ 21600
so the correct answer that will make both items correct is (A)

From: Qasim Jama,
Hargeisa, Somaliland (Formerly North Somalia)
BBA in Accounting and Prospective ACCA Student
Dear mustafa i tried to make your answer as perfectly as possible however i am not liable to any loss or damage resulting from information which i gave . you can ask also a more knowlegeable person byeeeee

Sorry for above explanation i couldnt delete it however it will help you or another freind somewhere on this earth byeeeeee

11. says

To: Mustafaacca
My dear freind they divided the year into four equal parts with three months in each division and that is what they call a “Quarter”
so the problem is that there is an overlap between quarters.
Quarter to 30 Nov. 2005 means three months ending in 30 Nov. 2005 that is to say three months starting from Sept. 1 2005.

in the first transaction we have recieved the bill for the three months starting from Sept. 1 2005 or ending in 30 Nov. at December 2005 so the bookkeeper has already entered it in Telephone expense account at December 2005 and the tellephone expense account has been closed off with zero balance by the accountant although it has been paid in january of 2006 it is the expense of previous year just what we do in January 2006 is to Debit Accrual account and Credit Cash Account no effect on expense account so no need of inclusion of amount First Transaction because we are working on 31 Dec. 2006

in the Second Transaction it says Quarter to February 28 2006 that is three months starting from Dec.1 2005 so that is one month of this expense belongs to the year 2005 and two month for 2006 wihich is our focus so in the second transaction the amount we charge tellphone is 2/3*798= \$ 532

for the third, fourth and fifth transaction add for the whole amount because all the nine months are in 2006
Note: now we have calculate the amount of tellephone expense for only 11 months of 2006

in the last transaction when the accountant is preparing the financial statements at 31 December 2006 may estimated although you can see it from the problem now 966 amount for quarter to February 2007 so the accountant should include one months tellephone expense of these three months to Tellephone expense of 2006 and that months is December of 2006. the amount is 1/3*966= \$ 322 Approx
so when you add up all the amounts it is (2/3*798+898+814.8+840+(1/3*966)= \$ 3407.6 and the correct answer is (C)

From: Qasim Jama,
Hargeisa, Somaliland (Formerly North Somalia)
BBA in Accounting and Prospective ACCA Student
Dear mustafa i tried to make your answer as perfectly as possible however i am not liable to any loss or damage resulting from information which i gave . you can ask also a more knowlegeable person byeeeee