Principles of Accounting: Both prepaid and accrued income and expenses

• We have already looked at the treatment of:
  1. Accrued expenses
  2. Accrued income
  3. Prepaid expenses
  4. Prepaid Income
• However the assumption in each case was that these cases would occur in isolation
• That is for example only an accrual would occur and not a prepayment for the same account in a given period
• While this is usually the case it is not uncommon for both accruals and prepayments to occur in the same account in the same period
• For example a business rents extra space to two separate customers
• One can prepay his rent while the tenant’s rent would still be owing at the end of the period
• In a later topic you will encounter non profit entities such as clubs whose main source of income is through subscriptions
• It is possible for some members to prepay their subscriptions in a given period
• In the same period some members might also be still to pay at the end of the period
• This is not just isolated to income
• Consider a business’s motor vehicle insurance expenses when a business has several motor vehicles
• Some vehicle’s insurance might be paid in advance while other vehicle’s insurance payments maybe still owing at the end of the period
• The entries for such accounts depend on whether it is an income/revenue or expenses account

Income account prepayments and accruals

• All payments received are recorded on the credit side
• Transfers to the Profit and Loss Account (Income Statement) are recorded on the debit side
• The given dates are for illustration purposes only you should use the ones given in the question/exercise you are doing
• You could replace the words Owing and Prepaid with the simple words Balance but this could end up confusing you and is less descriptive
• To help you remember the structure of the account just use the mnemonic OP|PO

Expenses account prepayments and accruals

• All payments paid out are on the debit side
• Transfers to the Profit and Loss Account (Income Statement) are recorded on the credit side of the expenses account
• The given dates are for illustration purposes only you should use the ones given in the question/exercise you are doing
• You could replace the words Owing and Prepaid with the simple words Balance but this could end up confusing you and is less descriptive
• To help you remember the structure of the account just use the mnemonic PO|OP

To access more topics go to the Principles of Accounts Notes.