Accruals and Prepayments - Principles Of Accounting
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A business makes a number of payments that give it the right to enjoy certain benefits over a period of time. Some of these payments, such as rates on the occupation of property, are paid in advance of the receipt of the bene-fit and are known as prepayments, while others, such as for the consumption of gas or electricity, are made in arrears and are known as accruals. The accruals concept is applied, and so, unless the period of time covered by these payments coincides exactly with the account-ing period, an adjustment is needed. The adjustment will either be an asset, to account for payments made in advance, or a liability, where payments are made in arrears. The value of accruals and prepayments for items that relate to a period of time is normally found by apportioning the cost on a time basis. Prepayments The entries in the accounts to record a prepayment are: Account debited Prepayment
Account credited Expense
With Value of prepayment
The credit of the prepayment in the expense account reduces the expense, and the prepayment is shown in the balance sheet as a current asset. In practice, the prepayment may be carried down in the expense account to which it relates. This is illustrated in Example below:
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Solution:
Accruals The entries in the accounts to record an accrual are: Account debited
Account credited
with
Expense
Accrual
Value of accrual
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The accrual increases the expense figure charged in the profit and loss account (debit) and is included as a current liability in the balance sheet (credit). In prac-tice, the accrual may be carried down in the expense account to which it relates. This is shown in Example:
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Accruals and Prepayments - Principles Of Accounting
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http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Solution:
/ http://www.principlesofaccounting2.com/ Reference: INTRODUCTION TO Accounting (Pru Marriott, J.R. Edwards and H.J. Mellett) Accruals and Prepayments Exercise
Q1 Martin Sicey started a welders business on 1st April 2001, and used 31st March 2002 as his financial year-end. The electricity bills for his first year had been paid as follows (all payments were by cheque)
2001 2001
date paid
amount
covering the period
18th July 16th Oct
$520 $860
1st April to 30th June 2001 1st July to 30th Sept 2001
2002
20th Jan $750 1st Oct to 31st Dec 2001 unpaid $940 1st Jan to 31st Mar 2002 Prepare the electricity account showing the final amount transferred to profit and loss account.
Q2 A sole trader’s Electricity account for the year ended 31 March 2004 showed the following. $ 1 April
2003
electricity owing
Payments made during the year by cheque
3,000
18,000
On 31 March 2004, $4,000 was owing by the trader for electricity. REQUIRED
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1. Prepare electricity account and show the amount transferred to the trader’s Profit and Loss Account for the year ended 31 March 2004. 2. Show relevant extract from Profit and Loss account 3. Show relevant extract from Balance Sheet
Q3 Kalim has a retail business and pays insurance on his premises. He pays an annual premium to the insurance company from 1 January to 31 December but prepares his accounts at 30 September.
At 1 October 2005 he had prepaid insurance of $300.
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ He paid the next year’s annual premium of $1320 on 1 January 2006.
REQUIRED 1. Show the entries in Kalim’s insurance account for the year ended 30 September 2006 including the transfer to the Profit and Loss Account for the year and the balance carried down at 30 September 2006. 2. Show relevant extract from Profit and Loss account 3. Show relevant extract from Balance Sheet Q4 Salman’s financial year ends on 31 March. He receives an invoice for telephone expenses quarterly in arrears.
On 1 April 2008, the telephone expenses outstanding amounts to $59 During the year ended 31 March 2009, his payments for expenses included the following:
2008
5 April
Telephone expenses paid in cash $59
2008
30 June
Telephone expenses paid by cheque $60
/ http://www.principlesofaccounting2.com/ 2 October
31 December
Telephone expenses paid by cheque $48
Telephone expenses paid by cheque $56
An invoice for telephone expenses for $63 was received on 31 March 2009. This was for telephone expenses up to the end of March, but was not paid until 10 April 2009
Prepare Telephone expenses account and show the amount transferred to Salman’s Profit and Loss Account for the year ended 31 March 2009.
Q5 Shah is a trader. His financial year ends on 31 July. He provides the following information.
At 1 August 2004,
Rent paid in advance
$ 500
Rates owing
$ 230
During the year ended 31 July 2005,
Total rent paid by cheques
$ 3,750
Total rates paid in cash
$ 2,230
At 31 July 2005, Rent paid in advance
$750
Rates outstanding
$130
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ REQUIRED
a) Show the entries in Shah’s Rent and rates account for the year ended 31 July 2005 including the transfer to the Profit and Loss Account for the year.
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Accruals and Prepayments - Principles Of Accounting
b)
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Show relevant extract from Profit and Loss account for the year ended 31 July 2005.
c)
Show relevant extract from Balance Sheet for the year ended 31 July 2005. Shazlyn paid the following expenditure on her business premises for the year 2006
Q6 2006
$
1 January
Insurance
31 July
2 500
Rates
31 December
500
Rates
1 500
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ The rates paid on 31 July 2003 was for the year 2005. Annual insurance premium is $3000 per annum. The rent and rates paid on 31 December 2006 was for three months ended 29 February 2007
Required Write up Rates account and Insurance a/c for the year ended 31 December 2003.Show clearly
the amount transferred to the profit and loss account for the year 2003.
Q7
Aishwary paid the following expenditure on her business premises for the year 2003
2003 1 January 31 December
Ground rent
1800
Ground rent
1400
/ http://www.principlesofaccounting2.com/ The ground rent paid on 1 January 2003 was for the year 2004.
It was agreed to pay a monthly rent of $100 from 1 January 2003. Required
Write up Rent account for the year ended 31 December 2003.Show clearly the amount transferred to the profit and loss account for the year 2003 Q8
Ruth is a trader. Her financial year ends on 31 March. She provides the following information.
April 1 Insurance prepaid for 3 months to 30 June 2004 amounted July 1
Paid insurance premium for 12 months to 30 June 2004 by cheque
$ 60 $264
Prepare the Insurance account as it would appear in Ruth’s ledger for the year ended 31 March 2004. Show clearly the amount transferred to the Profit and Loss Account.
Q9
On 1 October 2002 the Green Jackets Sports Club had prepaid insurance amounting to $190.
On 1 December 2002 the Club paid $1200 by cheque for 1 year’s insurance to 30 November 2003. Prepare the Insurance account as it would appear in the ledger of the Green Jackets Sports Club for the year ended 30 September 2003. Show clearly the amount transferred to the Income and Expenditure Account. Bring down the balance on 1 October 2003.
Q5
On 1 January 2007the LX had
Rent
$100 Dr
Loan interest
$900 Cr
the following balances
On 1 December 2002 the Club paid $2000 by cheque for annual rent to 29 February 2008 The loan interest has to be paid at the rate of %10 per annum on the loan balance Loan balance as at 31 December 2007
%10 000
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ Loan interest paid during the year $ 950
Prepare the Rent a/c and loan interest a/c as it would appear in the ledger for the year ended 31
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December 2007. Show clearly the amount transferred to the profit and loss Account. Bring down the balance on 1 January 2008 MCQ 1. How is the year-end insurance prepaid shown in the final accounts? A Current assets B Current liabilities C Trading expense D Capital expenditure
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ 2.
A trader provides the following information related to the
insurance
Outstanding at 1 January 2005 Cash refund for insurance
$400
$300
Annual insurance paid for the year
$8000
Which amount should be shown in the profit and loss account? A $8 100
3.
B $7600
C $7 9 000
D $8 000
The balance on the rent account showed $400 credit. How
is this shown in the final account? A As assets and prepayment B An asset and accrual C A liability and prepayment D A liability and accrual
/ http://www.principlesofaccounting2.com/ 4.
An electricity prepayment of $610 was treated as an
accrual when preparing the final account of the sole trader. What effect does this have on the net profit? A
It is overstated by $610
B
It is overstated by 1220
C
It is understated by $610
D
It is understated by 1220
1. An expense prepayment of $10 was treated as an accrual when preparing the final account of the sole trader. What effect does this have on the net profit? A
It is overstated by $10
B
It is understated by 20
C
It is overstated by $10
D
It is understated by 20
1. Tom, a trader, sublets part of his premises to Jane. At the end of Tom’s financial year Jane owes $150 for rent. How will the adjustment for this amount affect Tom’s final accounts? A
decrease expenses increase current liabilities
B
increase expenses increase current assets
C
decrease income increase current liabilities
D
Increase income increase current assets
1. An electricity accrual of $450 is treated as a prepayment when preparing a trader’s Profit and Loss Account. What effect does this have on the trader’s net profit?
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ A It is overstated by $450.
B It is understated by $450. C It is overstated by $900.
D It is understated by $900.
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1. A trader’s net profit is $20 000. Later the trader discovers the following omissions from the Profit and Loss Account: closing stock of stationery $600 rent receivable $200 What is the correct net profit? A $19 200
B $19 600
C $20 400
D $20 800
http://principlesofaccounting2.com/ http://principlesofaccounting2.com/ 1. In 2005 a business paid $3000 for electricity.
On 1 January 2005 $600 was owed for electricity.
On 31 December 2005 $1300 was owed for electricity. How much is charged for electricity in the Profit and Loss Account for 2005? A $3000 1.
B $3600
C $3700
D $4300
J. Peters rents premises at an annual rent of $2800. He provides the following information.
$ Rent accrued on 1 January 2005
350
Payments during 2005
3 600
What is the balance on the rent account at 31 December 2005? A $450 accrued B $450 prepaid C $1150 accrued D $1150 prepaid How is rent owing shown in the final accounts? A Current assets
/ http://www.principlesofaccounting2.com/ B Current liabilities
C profit and loss expense D Fixed costs
How is rent received outstanding shown in the final accounts? A
Current assets
B
Current liabilities
C
Fixed assets
D
Income
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