Accruals and Prepayments (part b) – ACCA Financial Accounting (FA) lectures
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Thank you sir .
Sir, I have a question. You said that when we entered the new year, accountant will reverse the double-entry and we will now have Prepaid: $1,000. But now if the co. shut down before the expire date of prepaid exp (30/6/X2), suppose it does so at the end of March, then what entry should we make to record this transaction in which the insurance co. repays our prepaid part and expense from Jan to March. Sorry for my bad grammar and ty anyone who replies.
Hello, could you please tell me where I can get a used study textbook for the FA 2022-23 financial reporting exam?
Try asking in the Buy and Sell Books forum on this website 馃檪
Dear John Moffat,
thank you very much for your lectures. I now understood how prepayment and accuals works but now, I’m very confused when I have to work with all four of them; prepayment expenses with prepayment income and accrual expenses with accrual income. Could you please explain those others two please?
Thank you,
Kind regards,
Lara
It is exactly the same logic as the way we deal with expenses, but instead we are dealing with income 馃檪
I think I can use examples to explain them.
Prepaid Income = This can be rental income. As in the example above, the insurance company is the one ‘receiving’ income for service(s) they are yet to provide.
Prepaid Expense = This is the expense the owner of the company (Karen) paid. So basically, it’s payment in advance. In Nigeria, we pay rent in advance. This is a prepaid expense for the tenant (as they’d have a roof over their head for a year, or as the case may be), but prepaid income for the Landlord.
Accrued Expense = Refers to an amount owing for which invoices have not been received & payment is yet to be made. For instance, postpaid electricity bills; these come after the electricity service has been used & invoices are issued for prior months.
Accrued Income = Now, the electricity company has provided their services to their customers, but yet to receive payment for it. This is accrued income.
When talk about prepayments such as monthly internet subscription where you pay before you consume it. Do you have to go through the whole book keeping process of placing in prepayments at the start of the month and then expensing it at the end of the month?
No. Any prepayments are sorted out only at the end of the year. (Some companies deal with them every month because they prepare monthly accounts, but that will never be the case in the exam.)
Thank you very much Sir for the beneficial lectures.
You are welcome 馃檪
actually i found a mistake in the note page 25,
Example 3 paragraph 2,
it printed 12 June 2001 ,
is it suppose to be 01 June 2001 ?
No, it is not a mistake.
It does not matter when the cash was paid, it is the period that it is paid for that matters.
Hello Sir John
First of all, excellent lectures. Very comprehensive and precise. I have a question in terms of the journal entries for the prepayment and accruals. I am mentioning them below. Would be great if you could advise if my understanding is correct and if the JE’s make sense and can be considered as the correct way of recording these transactions:
For Year ending Dec 2000
DEBIT Expense (Insurance) 1800
DEBIT Prepayment (Insurance) 1000
CREDIT Cash 2800
For Year ending Dec 2001
DEBIT Expense (Insurance) 1200
CREDIT Prepayment (Insurance) 1000
CREDIT Cash 1200
DEBIT Prepayment (Insurance) 1200
CREDIT Cash 1200
Also, can the year ending Dec 2001 entries be summarized as below:
DEBIT Expense (Insurance) 2200
DEBIT Prepayment (Insurance) 1000
CREDIT Cash 2400
This is not the subject in here, but I will show you one example of Journal Entry.
1 Jan 2000 to 31 December 2000
Cr Cash 2,800
Dr Insurance Expense 2,800
Dr Prepaid Insurance 1,000
Cr Insurance Expense 1,000
You need to learn double-entry bookkeeping.
I hope this answers your question.
Double entry for DR & CR should always match, the last one doesn’t match i.e.
Also, can the year ending Dec 2001 entries be summarized as below:
DEBIT Expense (Insurance) 2200
DEBIT Prepayment (Insurance) 1000
CREDIT Cash 2400
Very Clear. Thank you sir. I aspire to be very versed as you one day.
Thank you for your comment 馃檪
Amazing, Thanks
why we took 1000 as previous prepayment from 1 jan to 31 jul instead of 1200?
From 1 Jan to 30 Jun, the prepayment was taken because it was paid for last year.
As for the 1200, that didn’t include the first 6 months. We paid 1200 for 1jul 2001 to 30 Jun 2002.
Dear Sir,
It is still confusing for me that why prepayment of last year is still added in this year?
If you prepaid last year it means that you paid already for part of this year. So the amount prepaid is part of this years expense.
How do we know that part of the insurance is prepayments at the end of the year if we only credit cash and debit insurance when the transaction happened?
Because always with insurance you will know what period you are paying for – it will be on the invoice!
I see, thanks a lot
oh, I’ve got that, thanks for this useful video
do we only have four adjustments before the preparation of financial statements?
There are the four ‘standard’ adjustments that always need to be made. In addition, of course, any errors discovered will be corrected, but that is a separate issue – a correction rather than an adjustment.
Really detailed.