Accrued & Prepaid Expenses (Cambridge International IGCSE Accounting)

Accrued expenses

What is an accrued expense?

• An accrued expense is an expense that is still owed at the end of a financial period

  • This is also called an accrual
  • The expense is in arrears

• Accrued expenses can occur at the end of a financial period when a business pays less than the amount due in that period

  • This usually happens when the invoice period of an expense does not align with the financial period of the business

  • The business might pay at the end of the invoice period

    • However, this might be after the end of current financial period

• An accrued expense is a liability to the business

  • The business owes money

How do I record accrued expenses?

• The expense account will have a credit balance if there is an accrual at the end of the financial period

  • This indicates that it is a liability, as the business still owes money for that period

• The full amount that is due for the period is stated on the statement of profit or loss

• The amount that is accrued appears on the statement of financial position as a current liability

  • It is included in the amount for other payables

Example of an expense account with an accrual

Prepaid expenses

What is a prepaid expense?

• A prepaid expense is an expense for the next financial period that is paid in advance during the current financial period

  • This is also called a prepayment

• Prepaid expenses can occur at the end of a financial period when a business pays more than the amount due in that period

  • This commonly happens when the invoice period of an expense does not align with the financial period of the business

  • The business might pay an expense in full as soon as they receive an invoice

    • However, this invoice might also cover part of the next financial period

• A prepaid expense is an asset to the business

  • The business has paid too much to the supplier for that period
  • Technically, the business is owed money by the supplier

How do I record prepaid expenses?

• The expense account will have a debit balance if there is a prepayment at the end of the financial period

  • This indicates that it is an asset, as the business has already made payments that relate to the next financial period

• The full amount that is due for the period is stated on the statement of profit or loss

• The amount that is prepaid appears on the statement of financial position as a current asset

  • It is included in the amount for other receivables

Example of an expense account with a prepayment