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Hi
Please can you help me with a practice question from the ACCA f3 exam kit. The question tells me that at the 1/09/0X i have prepaid four months for an expense. The entries on the T Account are as follows:
Bal b/f 80 Bal b/f 95
Cash paid 95 P/L 385
Cash Paid 245 c/f 60
Accrual 120540 540
Bal b/f 60The question tells me i have prepaid four months from the 1 September and the cash paid is to clear the outstanding b/f accrual of 95 and 245 other bills during the year. i’m also told i have an outstanding bill for 120. I’m confused by the opening prepayment because in work for a prepayment i would be told to debit prepayment by 80 and credit cash by 80. The question wants to know the charge to the P/L at the 30 Sept, so going back to work we would reduce the asset by 20 and increse the expense by 20. So i would credit prepayment 20 and debit expense account by 20. I’m really confused by this question though as the 80 opening balance on the expense account has thrown me becasue if i have an opening balance of 80 on the expense then doesn’t this mean i will have an 80 credit on y prepayment account, which brings the prepayment to zero then, which would make sense if it was just for one month but i have prepaid four months and at the end of Sept i need to make sure that 20 of the prepayment is now moved to the expense account because we have now used it up. I just can’t get my head around the opening balance of 80 John.
My entries would be as follows
01/09/0X DR PP 80
01/09/0X CR Cash 8030/09/0X CR pp 20
30/09/0X DR Expense a/c 20I would then repeat the journal for the next month until all four payments had been moved from the SOFP over to the SOPL. I’m missing something and the only thing i can think of is that on the question the prepayment has been debited 80 and cash credited but then at the end of Sept the prepayemtn account has been credited in full 80 and the expense account debit with the 80. Then another debit entry will have been posted on the prepayment of 60 which would then mean the other entry is the c/f bal of 60 on the credit side of the expense, which will then become the opening balance for the 01/10/0X.
The whole question has just confused the hell out of me so please help
Firstly, I appreciate that you might do things differently at work, but this is the way we deal with accruals and prepayments in the exam.
At the end of last year we will have had a debit balance on the prepayments account (because it was in a sense owed back to us at the end of last year).
At the start of this year, we debit the expense (because it is an expense of this year) and credit prepayments, which clears the prepayments balance.
This year we credit cash and debit the expense with the amount paid this year.
Some of the cash paid this year is a payment for next year – a prepayment – so we credit the expense and debit prepayments.
The end result (ignoring the accruals) is that the expense is the prepayment at the start of the year, plus the cash paid during the year, less the amount that was prepaid (i.e. an expense of last year).
Again, I appreciate that you might do different at work (although the end result will be the same), but I am afraid you need to know how to do it this way for the exam.
I suggest that you watch my free lectures on accruals and prepayments where I go through all the rules, with examples.
The lectures are a complete free course for Paper F3 and cover everything needed to be able to pass the exam well.
HI John
I have watched all of your videos and find them to be excellent. I am ignoring how we operate in work and just following the exam practice questions. What has thrown me with this question is how the prepayment account would look, so am i right in thinking that it would be….
01/09/0X Credit prepayment 80
01/09/0X Debit Expense 8030/09/0X Debit prepayment 60
30/09/0X credit expense 60It is the wording of the questions that can confuse me at times as i understand the concept but with this question it is saying that from the 1 September i paid £80 expense in advance and the answer is in the back of the exam kit, so i looked and the opening prepaid expense on the expense T Account is a debit of 80. What then threw me was what the entry on the prepaid T account would be becasue if i have a debit on the expense account then this must mean that i have done a credit on the prepaid account. I was confused as to why i would close off the prepayment when i know that i sill have £60 to prepay. So just to make sure i have grasped this completely but would my prepayment account be as follows:
Cr PP 80
Cr expense 80Dr pp 60
Cr expense 60, which is the c/f balance at the end of Sept and will become the b/f balance at the start of October.The example is only using the month of September which again threw me. I find your videos are really easy to follow as you expalin things so well but the examples in the kit can be a bit tricky.
So for the c/f of £60 on the T account i need to just remember that the prepayment account will have first be debited with 60 and this c/f on the cr side of the expense is the other side of this entry. It did not give me the c/f figures you see as the example just said that on the 01 September £80 was paid in advance for 4 months, so i know that £20 needs to be posted to the SOPL at the end of each month. It also gave me what had been spent during the year and of course the accruals. That opening prepaid balance confused me as i couldn’t get my head round why the prepayment had been credited and closed off when i still had £60 prepayment left on the prepayment account. Sorry to waffle on but my exam is June and i need to make sure i fully understand.
Is this how my prepayment account would look then as below is the prepayment account how i think it would look following your advice. I would have done it as a t account but it goes all funny when posted so i’ve done the entries under one another as opposed to side by side.
01/09/0X Cr expense £80
30/09/0X Dr expense £6001/10/0X Cr expense £60
31/10/0X Dr expense £4001/11/0X Cr expense £40
30/11/0X Dr expense £2001/12/0X Cr expense £20 account is now clear and all expenses for the 4 months have been transferred to the SOPL and removed from SOFP.
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