ZIMSEC O Level Principles of Accounts Notes: 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

General Ledger
Revenue Account
1 JanuaryOwing b/dxxx1 JanuaryPrepaid b/dxxx
31 DecemberProfit and Lossxxxx30 JulyCash/Bankxxx
31 DecemberPrepaid c/dxxx31 DecemberOwing c/dxxx

xxxxx

xxxxx

1 JanuaryOwing b/dxxx1 JanuaryPrepaid b/dxxx
  • 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
DateDetailsAmount($)DateDetailsAmount($)
1 JanuaryPrepaid b/dxxx1 JanuaryOwing b/dxxx
4 JulyCash/Bankxxx31 DecemberProfit and Lossxxx
31 DecemberOwing c/dxxx31 DecemberPrepaid c/dxxx

xxxx

xxxx

1 JanuaryPrepaid b/dxxx1 JanuaryOwing b/dxxx
  • 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.

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