ZIMSEC O Level Principles of Accounts Notes: Both prepaid and accrued income and expenses
- We have already looked at the treatment of:
- 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
General Ledger | ||||||
Revenue Account | ||||||
1 January | Owing b/d | xxx | 1 January | Prepaid b/d | xxx | |
31 December | Profit and Loss | xxxx | 30 July | Cash/Bank | xxx | |
31 December | Prepaid c/d | xxx | 31 December | Owing c/d | xxx | |
xxxxx | xxxxx |
|||||
1 January | Owing b/d | xxx | 1 January | Prepaid b/d | xxx |
- 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
General Ledger | ||||||
Expense Account | ||||||
Date | Details | Amount($) | Date | Details | Amount($) | |
1 January | Prepaid b/d | xxx | 1 January | Owing b/d | xxx | |
4 July | Cash/Bank | xxx | 31 December | Profit and Loss | xxx | |
31 December | Owing c/d | xxx | 31 December | Prepaid c/d | xxx | |
xxxx | xxxx |
|||||
1 January | Prepaid b/d | xxx | 1 January | Owing b/d | xxx |
- 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.