Adjustments for Accrued & Prepaid Expenses (Cambridge International IGCSE Accounting)

Adjustments for accrued & prepaid expenses

How do I record accruals and prepayments of expenses on the financial statements?

• Calculate the total amount that is due for the current year

  • See the revision note Accrued & Prepaid Expenses for more information

• Accrued expenses are amounts which remain unpaid at the end of the accounting period

• Prepaid expenses are amounts that are paid in the current accounting period but relate to a future accounting period

• The total amount due for the year is the value included on the income statement

  • If an expense has an accrual then add that value to the balance of the account
  • If an expense has a prepayment then subtract that value from the balance of the account

• The amounts of the accruals or prepayments are stated on the statement of financial position

  • The amount of an expense that is accrued is treated as a current liability

    • Label it as other payables

  • The amount of an expense that is prepaid is treated as a current asset

    • Label it as other receivables

Exam Hint To help remember whether an accrual or a prepayment of an expense is an asset or a liability, consider whether the business still owes money. If it does, then it is a liability.

Exam Hint Where there are several accrued expenses, it is usual to show them all added as one figure on the statement of financial position called other payables under current liabilities. Similarly, several prepaid expenses are added together as one figure called other receivables under current assets.

Worked Example Jenny runs a garage and her financial year ends 31 December 2023.

Jenny receives the electricity bill for her garage at the end of each month. The charge is $250 per month and Jenny pays by cheque on the 5th of the following month. At 31 December 2023, Jenny has not yet paid the bill for December.

Jenny pays insurance, $600, every six months. The payment is made in advance of six months. At 31 December 2023, Jenny has paid in advance for the following three months.

Prepare extracts of the financial statements to show how the electricity and insurance are treated.

Answer:

Electricity:

• Calculate the amount due for the financial year

12 × $250 = $3 000

• This is the amount that will be stated on the income statement even though not all of it has been paid

• Identify the amount still owed for December

  • One month’s bill of $250
  • This will be listed as a current liability on the statement of financial position

Insurance:

• Calculate the amount due for the financial year

$600 ÷ 6 = $100 per month

12 × $100 = $1 200

• This is the amount that will be stated on the income statement even though more has been paid

• Identify the amount that has been paid in advance

Three months: 3 × $100 = $300

• This will be listed as a current asset on the statement of financial position

Final answer: Jenny Final answer: Income Statement (extract) for the year ended 31 December 2023
Final answer: Expenses	Final answer: $**	Final answer: **$
Final answer: Electricity	Final answer: 3 000
Final answer: Insurance	Final answer: 1 200	Final answer: 4 200

Final answer: Jenny Final answer: Statement of Financial Position (extract) at 31 December 2023
	Final answer: $
Final answer: Current assets
Final answer: Other receivables	Final answer: 300
Final answer: Current liabilities
Final answer: Other payables	Final answer: 250