Accruals & Prepayments

1. Accrued vs Prepaid Expenses

Expense: an outflow of the business — whatever we spend to run / maintain it (rent, insurance, salaries, electricity, stationery, telephone …).

	Accrued expense (owing)	Prepaid expense (advance)
Meaning	service used but not yet paid	paid, but service not yet used
Nature	Current liability → Cr	Current asset → Dr
Other names	owing · outstanding · arrears · unpaid · due	payment in advance
Example	staff worked, salary not paid yet; telephone used, bill unpaid	insurance paid for full year at start; $100 mobile top-up not yet used
In SOFP	Current liabilities → other payables	Current assets → other receivables

Example — rent $1,000 per month (annual expense $12,000)

Paid in the year	Used	Result
$12,000	12 months	neither accrued nor prepaid
$10,000	12 months	$2,000 accrued — used 12 months, paid only 10; still owe landlord → current liability
$15,000	12 months	$3,000 prepaid — rent for Jan, Feb, Mar of next year paid early → current asset

Prepaid money is not lost — the service will be used in a future period, so it is an asset now.

2. The Expense Account — “PAAP”

An expense account is a simple T-account that can hold two opening and two closing balances: opening prepaid, opening accrued, closing accrued, closing prepaid. In a question there can be all four, three, two — or at minimum one adjustment.

• Balance c/d is always on the opposite side to the b/d of the same type — and next year’s b/d is on the opposite side to this year’s c/d (“the side always changes”).
• Two Ps = opening & closing prepaid; two As = opening & closing accrued.
• If the question says a “credit balance” / “debit balance” at the start → put the b/d on that side.

In the exam write only “Balance b/d” and “Balance c/d” (b/d = brought down = opening; c/d = carried down = closing).

Entries in the expense account

Event	Entry	Reference (details column)
Pay the expense	Dr Expense / Cr Bank (or Cash)	write Bank; write Cash only if the question says cash. (Cheque = bank)
Invoice received, not paid yet	Dr Expense / Cr Supplier	write the supplier’s name (or Payables if no name given)
Year end	Cr Expense / Dr Income Statement	balancing figure on the credit side, dated year-end

Dummy example — year 2020 (board)

Expense Account

Date	Details	$	Date	Details	$
1 Jan 20	Balance b/d	–	1 Jan 20	Balance b/d	500
31 Dec 20	Bank / Cash	6,000	31 Dec 20	Income Statement	4,800
31 Dec 20	Balance c/d	300	31 Dec 20	Balance c/d	1,000
		6,300			6,300
1 Jan 21	Balance b/d	1,000	1 Jan 21	Balance b/d	300

Here: opening accrued 500 (Cr b/d) · closing prepaid 1,000 (c/d Cr) · closing accrued 300 (c/d Dr) · next year b/d 1,000 Dr (prepaid) & 300 Cr (accrued). 4,800 = this year’s real expense → shown after gross profit in the income statement.

• Dates: if a year ends 31 Dec it began 1 Jan; year ending Aug began 1 Sept; year ending 30 Nov began 1 Dec. b/d = first day of year; c/d = last day; new b/d = next day (31 Dec 20 → 1 Jan 21).
• If a bank entry has no date → assume the year-end date. If the question gives no balances at all (first year of a new property) → no b/d.
• Closing balances are shown in the SOFP: accrued → current liability (other payables); prepaid → current asset (other receivables).

3. Why we do this — Matching Concept

Definition: Income and expenses shall be matched in the same accounting period (earlier called the accruals concept).

• We match the timing, not the amounts — it does not mean income = expense (then there would never be profit).
• Record an expense in the period it was used and income in the period it was earned — not when cash is actually paid / received.
• So a new property rented for 8 months → charge only 8 months of rent this year, not 12.

4. Practice — Expense Accounts

All questions below are the teacher’s own / past-paper questions from the board. Same recipe every time (see the flow-chart below).

Q2 — ARD rent (expense account)

Rent Account

Date	Details	$	Date	Details	$
1 Apr	Bank	2,500	30 Nov 15	Income Statement [10,000 × 8/12] (A)	6,667
1 Jul	Bank	2,500	30 Nov 15	Balance c/d (P) [Apr–Nov used]	833
1 Oct	Bank	2,500
		7,500			7,500
1 Dec 15	Balance b/d	833

9 months paid (3 × 3) − 8 used = 1 month prepaid = 833 → asset → SOFP: current assets, other receivables $833. No opening balance (first year of the property).

Q4 — Zikri rent (past paper)

Zikri — Rent account

Date	Details	$	Date	Details	$
1 Jan 17	Bank	4,800	31 Aug 17	Income Statement [9,600 × 8/12]	6,400
1 Jul 17	Bank	4,800	31 Aug 17	Balance c/d [4,800 × 4/6]	3,200
		9,600			9,600
1 Sep 17	Balance b/d	3,200

Opening prepaid → debit; closing prepaid → credit (c/d). 4,800 ÷ 6 = 800 a month → 4 months = 3,200 prepaid.

Zikri — Stationery account (interpret a ledger)

Stationery account

Date	Details	$	Date	Details	$
1 Sep 16	Balance b/d	84	31 Jul 17	Drawings	15
8 Feb 17	XY Limited	212	31 Aug 17	Income Statement	205
			31 Aug 17	Balance c/d	76
		296			296

(c) Entry	Explanation	Double entry
Balance b/d 1 Sep 2016	Value of unused stationery at start of the year	Credit stationery a/c for the previous financial year (it was last year’s c/d)
XY Limited 8 Feb 2017	Value of stationery purchased on credit from XY Limited	Credit XY Limited account (our supplier)
Drawings 31 Jul 2017	Value of stationery taken by Zikri for personal use	Debit Drawings account

(d) Amount transferred to income statement = $205   (e) Section of SOFP = Current assets (stationery left is used within months — ink, paper, markers don’t last years).

Q5 — Ishmael Makumbo, motor expenses

Ishmael Makumbo — Motor expenses

Date	Details	$	Date	Details	$
7 Sep 14	Bank 1	274	1 Sep 14	Balance b/d 1	274
1 Feb 15	Cash 1	96	31 Aug 15	Income Statement 1	209
30 Aug 15	Payable 1	113
		483			483

The invoice (113) is already recorded as an expense via Payables, so no balance c/d / b/d is needed at the end. Red circled marks on the board = one mark each.

Q6 — Paul: combined rent & rates account

Paul — Rent and rates account

Date	Details	$	Date	Details	$
1 Jan 15	Balance b/d Rates 900 · Rent 3,200 (P)	4,100	31 Dec 15	Income Statement	13,470
1 Apr	Bank	3,960	31 Dec 15	Balance c/d (P) [Rates 3,960 × 3/12]	990
1 May	Bank	4,800
31 Dec 15	Balance c/d (A) [Rent 4,800 × 2/6]	1,600
		14,460			14,460
1 Jan 16	Balance b/d (Rates)	990	1 Jan 16	Balance b/d (Rent)	1,600

Two c/d balances → two b/d: prepaid rates 990 on Dr (asset), accrued rent 1,600 on Cr (liability). SOFP: other receivables 990; other payables 1,600.

Q8 — Katie: expense account + supplier account together

Transaction	Stationery a/c (expense)	A1 Stationers a/c (supplier)
12 May cash 95	Dr 95 · ref Cash	—
9 Jul pay A1 (114)	—	Dr 114 · ref Bank (liability falls)
30 Nov buy on credit 217	Dr 217 · ref A1 Stationers	Cr 217 · ref Stationery (liability rises)
6 Dec return 53	Cr 53 · ref A1 (expense falls)	Dr 53 · ref Stationery (liability falls)

Katie — Stationery account

Date	Details	$	Date	Details	$
1 May 15	Balance b/d	182	6 Dec	A1 Stationers	53
12 May	Cash	95	30 Apr 16	Income Statement	245
30 Nov	A1 Stationers	217	30 Apr 16	Balance c/d	196
		494			494
1 May 16	Balance b/d	196

A1 Stationers account

Date	Details	$	Date	Details	$
9 Jul	Bank	114	1 May 15	Balance b/d	114
6 Dec	Stationery	53	30 Nov	Stationery	217
30 Apr 16	Balance c/d	164
		331			331
			1 May 16	Balance b/d	164

Supplier (liability) → bigger side is credit; balancing figure = c/d 164 on Dr → b/d 164 on Cr = we still owe A1 $164 (current liability: trade payables).

Q9 — Maria: telephone expense + supplier (Midland Telecom)

Midland Telecoms account (supplier)

Date	Details	$	Date	Details	$
31 May	Bank 1	400	1 May 14	Balance b/d 1	400
15 Jul	Discount Received 1	24	26 Jun	Telephone Expense 1	1,200
	Bank 1	1,176
		1,600			1,600

Telephone Expense account

Date	Details	$	Date	Details	$
26 Jun	Midland Telecom 1	1,200	31 Jul	Income Statement 1	1,330
31 Jul	Balance c/d 1	130
		1,330			1,330
			1 Aug 14	Balance b/d 1	130

Supplier account balances exactly (1,600 both sides) → no b/d. Telephone expense for the 3 months = 1,330 (1,200 billed + 130 estimated). Mistake: writing “Telephone expense” as the reference in the expense account too → no mark.

5. Accrued & Prepaid INCOME

	Accrued income	Prepaid income
Meaning	service provided, money not received yet	money received in advance, service not yet provided
Nature	Current asset (receivable) → Dr b/d	Current liability (we must still provide / refund) → Cr b/d
SOFP	other receivables	other payables
Examples	tenant owes rent; school fees unpaid; commission owed to us	tenant paid year in advance; fees paid at start of month before teaching

Landlord ⇄ tenant — the same facts, opposite sides

	Tenant (rent = EXPENSE)	Landlord (rent = INCOME)
Used the property, not paid yet	accrued expense → liability (CL)	accrued income → asset (CA)
Paid year’s rent in advance	prepaid expense → asset (CA)	prepaid income → liability (CL) — if he makes you vacate, you refund the unused months

Items debited in an expense a/c are credited in an income a/c, and vice-versa. Quick check: b/d on Dr = asset = accrued income; b/d on Cr = liability = prepaid income.

• Receive income: Dr Bank (or Cash) / Cr Income a/c (bank unless cash is stated). Year end: Dr Income a/c / Cr Income Statement.
• Income accounts: rent received (= rent receivable — examiner uses both!), fees received, commission received (= commission receivable), advertising income.
• Income statement date = year-end; bank date = date received, else write the year-end date.

Dummy example — commission / fees received (board)

Income Account

Date	Details	$	Date	Details	$
1 Jan 20	Balance b/d (accrued)	3,000	1 Jan 20	Balance b/d	–
31 Dec 20	Income Statement	8,500	31 Dec 20	Bank / Cash	10,000
31 Dec 20	Balance c/d (prepaid)	500	31 Dec 20	Balance c/d (accrued)	2,000
		12,000			12,000
1 Jan 21	Balance b/d	2,000	1 Jan 21	Balance b/d	500

Here the bigger side is the credit side. Opening accrued 3,000 = last year’s income not yet received. Not all four adjustments are needed — minimum one.

Q2 — ARD sub-lets part of the premises (rent received)

Rent Received Account

Date	Details	$	Date	Details	$
30 Nov 15	Income Statement [6,000 × 7/12] (A)	3,500	1 May	Bank	1,500
30 Nov 15	Balance c/d (P)	1,000	1 Aug	Bank	1,500
			1 Nov	Bank	1,500
		4,500			4,500
			1 Dec 15	Balance b/d	1,000

9 months received (3 × 3) − 7 earned = 2 months extra = liability (we’d have to give the premises or refund). Shown in SOFP: current liabilities, other payables $1,000. IS: 3,500 in other income section. No opening balance — first year.

Q3 — Lyana, rent receivable (past paper)

Rent Receivable Account

Date	Details	$	Date	Details	$
31 Jan 16	Bank (Refund)	700	1 Oct 15	Balance b/d	2,500
30 Sep 16	Income Statement	12,000	31 Dec 15	Bank	6,700
			30 Apr 16	Bank	3,100
			30 Sep 16	Balance c/d	400
		12,700			12,700
1 Oct 16	Balance b/d	400

Bigger side = debit → balancing c/d 400 goes on the credit side; b/d 1 Oct 16 400 on Dr = asset = accrued income (tenant still owes 400). Two ways to tell: ① APPA — Dr b/d = accrued; ② asset/liability logic — Dr b/d is an asset, and an income is only an asset when it is accrued.

Q4 — Zikri, commission receivable

Zikri — Commission receivable account

Date	Details	$	Date	Details	$
1 Sep 16	Balance b/d	495	4 Sep 16	Bank	495
31 Aug 17	Income Statement	1,685	3 Dec 16	Bank	515
			5 Mar 17	Bank	374
			2 Jun 17	Bank	404
			31 Aug 17	Balance c/d	392
		2,180			2,180
1 Sep 17	Balance b/d	392

b/d 392 on Dr = asset (receivable; Ashley still owes) → current asset, other receivables, to be received next year.

6. More exam-style questions explained in the lesson

These were worked through in the recording but their board pages were not in the PDF — numbers below follow the lesson.

A. Other receivables — rates & advertising (year ended 30 Sep 2021)

Other receivables = prepaid expenses + accrued income (here only prepaid expenses). Make a rough T-account for each expense.

Rates (rough working)

Date	Details	$	Date	Details	$
	Bank	14,000	1 Oct 20	Balance b/d (accrued)	2,500
				Income Statement	10,000
			30 Sep 21	Balance c/d (prepaid)	1,500
		14,000			14,000

Should have paid 2,500 (last year) + 10,000 (this year) = 12,500; paid 14,000 → 1,500 extra = prepaid → other receivables (SOFP current assets).

Advertising (rough working)

Date	Details	$	Date	Details	$
	Bank	4,800	30 Sep 21	Income Statement	3,700
			30 Sep 21	Balance c/d	1,100
		4,800			4,800

Other receivables = 1,500 + 1,100 = $2,600. (If the examiner asks for the advertising expense, use the IS figure 3,700.)

B. Cash book & extract of current assets (same question)

• Two-column cash book (3-column if discounts are given: discount allowed on Dr, discount received on Cr). Receipts → Dr; payments → Cr.
• Opening 1 Oct 2020: cash in hand 230 (cash is always a debit); bank 960 Dr. If bank says “Cr” = overdraft. No Dr/Cr stated → assume debit.
• Contra (cash banked, 715): Dr Bank, ref Cash · Cr Cash, ref Bank — opposite reference on each side.
• Dishonoured cheque (300 received then bounced): reverse → Cr Bank, Dr Customer; write “dishonoured (customer’s name)”.
• Balancing: cash’s bigger side is always Dr (no negative cash) → cash c/d 150. Bank: bigger side Dr → positive balance 1,560 Dr; bigger side Cr → overdraft.

Extract — Current assets (order: least liquid first)
Inventory	from the earlier part (standard + super + deluxe)
Trade receivables	10,100
less: provision for doubtful debts	(550) = 300 + 250 increase; or % × 10,100
	9,550
Other receivables	2,600 (rates 1,500 + advertising 1,100)
Bank	1,560
Cash	150

(Board writes “order by liquidity”: inventory first → cash last.)

C. Rent payable & rent receivable (year ended 30 Sep 2022)

Rent Payable Account

Date	Details	$	Date	Details	$
30 Sep 22	Bank (balancing: 10,250 − 600)	9,650	1 Oct 21	Balance b/d	650
30 Sep 22	Balance c/d	600	30 Sep 22	Income Statement	9,600
		10,250			10,250
			1 Oct 22	Balance b/d	600

Rent Receivable Account

Date	Details	$	Date	Details	$
1 Oct 21	Balance b/d	250	30 Sep 22	Bank	5,000
30 Sep 22	Income Statement	6,750	30 Sep 22	Balance c/d	2,000
		7,000			7,000
1 Oct 22	Balance b/d	2,000

c/d 2,000 on Cr → b/d on Dr = asset = accrued income (tenant owes 2,000 at year end).

7. Statement of Financial Position (SOFP) format

ARD — Statement of financial position as at 31 Dec 2021
Assets	Cost $	Acc Dep $	NBV $
Non-current assets
Land & buildings · Motor vehicles · Fixtures & fittings	xx	(xx)	xx
Current assets (order by liquidity)
Inventory		xx
Trade receivables xx  less: provision for doubtful debts (x)	xx	xx
Other receivables · Bank · Cash		xx	xx
Total assets			xx

Equity & liabilities	$	$	$
Opening capital		xx
Add: profit for the year		xx
Less: drawings		(xx)	xx
Non-current liability — bank loan 2023 (repayable after 12 months)			xx
Current liabilities — trade payables · other payables · bank overdraft	xx	xx	xx
Total capital & liabilities			xx

Item from this chapter	Goes to
Prepaid expense · accrued income	Current assets → other receivables
Accrued expense · prepaid income	Current liabilities → other payables
Expense for the year (IS figure)	Income statement, after gross profit
Income for the year (IS figure)	Income statement, other income

Q4 — Bik, sole trader (May 2017 Paper 21): SOFP at 28 Feb 2017

#	Adjustment (28 Feb 2017)	Treatment
1	Inventory valued $20,700	Current asset: inventory 20,700
2	Staff salaries include $8,000 paid to Bik	It is drawings: 9,500 + 8,000 = 17,500
3	Rent receivable $3,000 owing	Accrued income → other receivables 3,000
4	General expenses $5,000 owing	Accrued expense → other payables
5	No interest paid on bank loan	8% × 60,000 = 4,800 owing → other payables: 5,000 + 4,800 = 9,800
6	New shop fixtures $8,000 bought by cheque; no entries made	Fixtures cost 24,000 + 8,000 = 32,000; bank 20,500 − 8,000 = 12,500
7	Depreciate all NCA owned at year end: (i) leasehold 20-yr lease (ii) shop fixtures 15% straight line (iii) computers 30% reducing balance	(i) 90,000 ÷ 20 = 4,500 → acc dep 13,500 + 4,500 = 18,000 (ii) 15% × 32,000 = 4,800 → 14,000 + 4,800 = 18,800 (iii) NBV 60,000 − 42,000 = 18,000; × 30% = 5,400 → 42,000 + 5,400 = 47,400
8	Receivables $2,500 irrecoverable → write off; keep provision 5%	34,500 − 2,500 = 32,000; provision 5% × 32,000 = 1,600 → net 30,400

Bik — SOFP as at 28 Feb 2017 (ASSETS)
	Cost	Acc Dep	NBV
Leasehold building	90,000	(18,000)	72,000
Shop fixtures [24 + 8]	32,000	(18,800)	13,200
Computer equipment	60,000	(47,400)	12,600
Non-current assets			97,800
Inventory		20,700
Trade receivables 32,000 less provision (1,600)	32,000	30,400
Other receivables (rent receivable)		3,000
Bank [20,500 − 8,000]		12,500	66,600
Total assets			164,400

Bik — CAPITAL & LIABILITIES
Opening capital		100,000
Less: loss for the year		(13,500)
Less: drawings [9,500 + 8,000]		(17,500)	69,000
Current liabilities: trade payables		25,600
Other payables [5,000 + 4,800]		9,800
8% bank loan 2017		60,000	95,400
Total capital & liabilities			164,400

The loss of 13,500 comes from the income statement part of the question (not on the board pages). Quick check: gross profit 183,800 + rent receivable 18,000 − expenses 215,300 (incl. depreciation 14,700, interest 4,800, irrecoverable 2,500, extra provision 500, disposal loss 6,000) = −13,500 ✓.

8. Quick Recap — Cheat-sheet