Borcelle

Week 5

Accurals &
Prepayment
Annual Finance statement preparation
aspect (adjusting entries)
Financial Accounting
process of recording, summarising, and analyzing an
entity financial transaction and reporting them in
financial statement to its exsisting stakeholder to
create a decision making

Financial Statement
A formal report that summarizes financial performance.
To create these statements, certain rules must be
followed, such as the accrual basis of accounting.

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Accruals concept
Recognize the difference between the actual cash
payment and the legal responsibility to pay cash, as
well as the distinction between receiving cash and the
legal entitlement to receive it.

Entry basis of accounting

trough accrual

Revenue is recognise as its earned and expenses are

recorded as they are incurred

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 Goods or service

Buyer Seller
Money

Payment and invoice does’nt dictate our revenue

and expenses, the transaction and the usage of
good and service what triggers the statement Accounting period
A transaction that does’nt met the accounting invoice usage payment
period need to create a adjusted entries (example :
insurance in 5 year pay in advance or pay a rent in the
end of year) 2019 2020 2021

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adjusting entries adjusting entries

journal entries in a company's general ledger that

occur at the end of an accounting period to record any
unrecognized transactions for that period

there are 2 main types of adjusting entry :

Prepayment Accruals
Prepayment : occur when good or services have
been paid in advance (ex: insurance, any
receivable)
Accruals : when good and services are to be Prepaid expense Prepaid Revenue Accrued Expenses Accrued Revenue
invoiced in the future (ex; rent, any payable)

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Prepayment vs Accrual
Prepayment Accruals
Payment Good & Services Good & Services Payment

Past Future Past Future

The Buyer will be recognize the The Buyer will be recognize the
expense in the past expense in the future
The seller will be recognize the The seller will be recognize the
expense in the future expense in the past

We need to adjust the trial balance to reverse out, those revenue and expense from the
income statement and hold them in the balance sheet where are not impacting past
financial performance

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EXAMPLE SCENARIO

Rent Account

ACCURED
A company have rents
some office space for
$2,000 per month.

EXPENSES
The rent for December
has not been paid by
the financial year-end
(December 31).

Income Statement a means of recording an expense that was

incurred in one accounting period but not
paid until a future accounting period.
(effect the buyer adjustment because the
goods its taken away

Financial position

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EXAMPLE SCENARIO

ACCURED
EXPENSES

How much expense should be shown in the income statement & financial position

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EXAMPLE SCENARIO

Insurance Account

PREPAID
A company pays $2,300
for insurance on
December 1. Of this

EXPENSES
amount, $100 applies to
January of the next year.
The company prepares its
financial statements as of
December 31. Record the
necessary adjusting
entries an expense that is paid for in advance.
Recurring expenses such as insurance and
rent can be paid for with one payment that
covers the cost of the expense for several
months or even a year. Often, businesses
prepay expenses in this manner because
Financial position they can receive a discount.

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EXAMPLE SCENARIO

PREPAID
EXPENSES

How much expense should be shown in the income statement & financial position

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Mixed Balances
Sometimes, the business will have an expense where there is a
prepayment at the start of the period and an accrual at the end of the
period. It could also be the other way around.

This is not a problem as long as you remember that prepayments are

assets and have debit balance b/d figures, while accruals are liabilities and
have credit balance b/d figures.

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Mixed Balances

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Grouping expenses
It is possible that a business might put several expenses under one
category, e.g. rent, rates and insurance, which makes it possible that there
might be more than two adjustments. As long as you apply the previous
concepts, applying your double-entry concepts in a ledger account will
enable you to identify the amount of expense that will appear in the
statement of profit or loss.

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Grouping expenses

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Grouping expenses

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Outstanding Scenario:
Lori sublets rooms above her shop for $50 per week.

Revenue At December 31 (financial year-end), the tenant owes rent for

the last two weeks of the year.
Solution:
1. Calculation:
Revenue earned during the current Rent owed = $50/week × 2 weeks = $100.
accounting period but not yet received by the 2. Journal Entry:
financial year-end. (Accured Revenue)
Dr Receivables (Outstanding Rent) $100
Cr Lori Income $100
Accounting treatment
Recognized in the income
3. Financial Statement Impact:
statement as revenue.
Recorded in the statement Income Statement:
learn More of financial position as a Rental Income = $2,600 (52 weeks × $50).
current asset under
receivables.
Statement of Financial Position:
Receivables (Outstanding Rent) = $100.

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Revenue Paid Scenario:
Hua earns $5,320 in commission for the year ending January 31.

in Advance By year-end, Hua has received commission payments totaling

$6,000, of which $680 is for the next year.
Solution:
1. Calculation:
Revenue received before the services or
Commission received in advance = $6,000 - $5,320 = $680.
goods are provided, relating to future
2. Journal Entry:
accounting periods. (Prepaid Revenue)
Dr Cash $6,000
Cr Commission Income $5,320
Accounting treatment Cr Unearned Revenue (Liability) $680
Excluded from the income
statement of the current 3.Financial Statement Impact:
learn More year.
Income Statement:
Recorded in the statement
of financial position as a Commission Income = $5,320.
current liability under Statement of Financial Position:
unearned revenue.
Unearned Revenue = $680.

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 Question
Gerda sublets part of her premises for $6,240 per
year. At the financial year-end (July 31), her tenant has
paid $6,600. This amount includes an advance
payment for the next year.
Calculate:
1. The amount of rental income to be recorded in the
current year.
2. The amount of revenue paid in advance to be
recorded as a liability.
3. Prepare the necessary journal entries for the
adjustments.

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 Study Material

Reading Material Persentation

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 Thank You

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