A basic test on accruals

 

A basic test on accruals:

 

You are working on the accounting records of a business for the year ended 31 March 20X7. You are looking at the rent expense for the year and this includes payments for the following periods:

 

Apr 20X6 – May 20X7- Office 1	£5,040
Apr 20X6 – Jan 20X7- Office 2	£5,500

 

Identify the accruals that need to be posted into the accounts?

 

Account name	Amount (£)	Dr/ Cr

A Basic Test on Accruals - YouTube

Prepaid Income

 

Prepaid income is an amount received in advance for a sundry income which relates to an accounting period after the year end.

 

In accounting for prepaid income, the effect that needs to occur will be to reduce the overpayment in income in an attempt to account for only the income earned in that accounting period and then to increase the liability in that accounting period, recognising that the business acts as a custodian of that amount paid in advance, so it should not be accounted for as income, rather it is a liability in the hands of the business until it earns that amount of money.

Example:

You are working on the accounting records of a manufacturing business for the year ended 30 June 20X6. You are looking at the rental income for the year and this shows receipts for the following periods:

 

July 20X5 – July 20X6	£1,105
July 20X5 – September 20X6	£1,590

 

Calculate the value of the adjustment required for the rental income account as at 30 June 20X6 and show the journal entry needed for the relevant adjustment.

Solution:

		Prepaid income
July 20X5 – July 20X6	£1,105	£1105/13x1= £85
July 20X5 – September 20X6	£1,590	£1590/15x3=£318
Total prepaid income adjustment needed		£1068+£330=£403

                      

Account name	Amount (£)	Dr/ Cr
Rental income	403	Dr
Prepaid income	403	Cr

Prepaid Income - YouTube

Accrued Income

Accrued income is a sundry income amount outstanding and yet to be received by the end of an accounting period, so has not been entered into the ledger accounts.

 

In accounting for accrued income, the effect that needs to occur will be to increase the relevant income in an attempt to account for the total income due to the business in that accounting period and then to increase the asset- accrued income which is like debtors in that accounting period, recognising that the business is owed that amount.

Example:

You are working on the accounting records of a manufacturing business for the year ended 30 June 20X6. You are looking at the rental income for the year and this shows receipts for the following periods:

 

July 20X5 – March 20X6	£990
July 20X5 – December 20X5	£1,068

 

Calculate the value of the adjustment required for the rental income account as at 30 June 20X6 and show the journal entry needed for the relevant adjustment.

Solution:

		Accrued income
July 20X5 – March 20X6	£990	£990/9x3= £330
July 20X5 – December 20X5	£1,068	£1068/6x6=£1068
Total accrued income adjustment needed		£1068+£330=£1398

                      

Account name	Amount (£)	Dr/ Cr
Accrued income	1,398	Dr
Rental income	1,398	Cr

Accrued Income - YouTube

Prepayments

 

A prepayment is an amount paid in advance for an expense which relates to an accounting period after the year end.

In accounting for prepayments, the effect that needs to occur will be to reduce the relevant expenditure in an attempt to account for the transactions which have been overpaid and then to increase the asset in that accounting period, recognising that the business could be owed that amount.

Example:

You are working on the accounting records of a business for the year ended 31 January 20X7. You are looking at the business rates expense for the year and this shows payments for the following periods:

                                                 

Feb 20X6 – Mar 20X7- Office 1	£1,568
Feb 20X6 – Feb 20X7- Office 2	£1,287

 

Calculate the value of the adjustment required for the business rates account as at 31 January 20X7 and show the journal entry needed for the relevant adjustment.

Solution:

		Prepayments
Feb 20X6 – Mar 20X7- Office 1	£1,568	£1568/14x2= £224
Feb 20X6 – Feb 20X6- Office 2	£1,287	£1287/13x1=99
Total prepayments adjustment needed		£224+£99=£323

                      

Account name	Amount (£)	Dr/ Cr
Prepayments	323	Dr
Business rates	323	Cr

Prepayments - YouTube