Comments

  1. avatar says

    prepayments comes under non-current assets. would you classify rent as a prepayment and if yes what if the rent was paid two years in advance then it should come under current assets because its over one year. how would you treat two years advance payment on rent in the statement of financial position.

    Thanks

    • Profile photo of John Moffat says

      Prepayments certainly do not come under non-current assets – they are current assets.

      Rent is a prepayment if it has been paid in advance and will be classified as a current asset (even if it is paid for two years in advance).

      Although we usually say that non-current assets are assets lasting more than one that is not the strict definition of them (the one-year rule is only a strict rule when it comes to current and non-current liabilities)

      Two years advance payment of rent is exactly the same as a prepayment of rent.

  2. Profile photo of Diana says

    Hi John, very useful lectures, thank you! Just a quick silly question: after taking large amounts of drawings and capital and the profit is fully repaid to the owner… how do we record the rest of wages/drawings if any, taking out by the owner? Is he allowed to withdraw more than he is owed?

    • Profile photo of John Moffat says

      A few things.
      Firstly, anything taken by the owner is called drawings (a sole trader does not pay wages to the owner – it is drawings).
      Secondly, there is no law stopping the owner taking as much drawings as they want (there is for limited companies but not for sole traders).
      However, in practice they will not take out more that they are owed (capital plus profits) because it would mean selling all the assets and having an overdraft with the bank. The bank is not going to let them have an overdraft if the business has no assets left :-)

    • Profile photo of John Moffat says

      Expenses are costs of running the business..

      Drawings are not an expense – it is money taken out of the business by the owner.

      An accrual is an expense for the period that has not yet been paid and is still owing.

  3. Profile photo of Mahoysam says

    Hi – One thing I didn’t get, why would we consider wages and salaries as (drawings)? Just because it was taken by the owner? From what I know wages and salaries are considered to be business expense called salaries expense or so and yes they are deducted from the capital but they are not called “drawings”, drawings are what the owner takes out the capital for his own personal use, can you explain please?

  4. avatar says

    Good tuition. I have a question. The financial year ends June 30, 2011. I have received an invoice for $1,200 for insurance which runs from May 1 2011 to 30 April 2012. What is the treatment of this invoice in the income statement and statement of financial position for the year ended June 30, 2011?

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