ACCRUALS AND PREPAYMENTS

ACCRUALS AND PREPAYMENTS

One  of the fundamental concepts of accounting is the accrual concepts it states that expenses must be matched with income and reported for the period which they relate regardless when the cash was actually received or paid.

 

In keeping to this concepts, these could be

1.             Accrued expenses/ accruals
2.             Prepaid expenses/prepayments

iii.            Accrued incomes

1.             Incomes received in advance.
2. Accrued expenses: these are expenses due but which are not yet paid as at balance sheet date.

In the profit and loss account, it is added to the expenses shown on the trail balance to obtain the actual expenses incurred for the period. In  balance sheet it is shown as a current liability.

1. Prepaid Expenses/Prepayments: These are expenses which are not yet due but have been paid as at trail balance date.

In the profit and loss account it is deducted from the amount on the trail balance to arrive at the actual expenses, it is shown as a current asset.

iii.      Accrued Income: These are income due but not yet received as at trail balance date. In the profit and loss, it is added to the amount of that income shown on the trail balance. In the balance sheet it is shown as current asset.

1. Incomes Received in Advance: These are incomes not yet due but had been received as at trial balance date. In the profit and loss account, it is deducted from the amount of that income shown on the trail balance. In the balance sheet it is shown as current liability.

Illustration I

Tola stated a business on April 2013 and prepares her final accounts on March 31^st 2014. On July 1^stshe paid an annual insurance premium of N3, 000 by cheque to cover her premises and stock for twelve months from that date.

You are required to show the insurance account indicating the figure to be transferred to profit and loss account at the end of March 2014.