Accruals & Prepayments - Example 2

Accruals and prepayments

Purpose

To comply with the accounting matching concept i.e. to match the income and expense in the correct accounting period.

Therefore, a provision or an adjustment must be made for both the accruals and prepayments

Accruals

Either the income or expense for which there is no invoice has been issued yet but that relates to the accounting period.

Prepayments

Either the income is received in advance or an expense invoiced in advance for the goods or services.

To comply with the accounting matching concept i.e. to match the income and expense in the correct accounting period.

Therefore, a provision or an adjustment must be made for both the accruals and prepayments

Either the income or expense for which there is no invoice has been issued yet but that relates to the accounting period.

Either the income is received in advance or an expense invoiced in advance for the goods or services.

Prepayments - Expense

Example 1

Accounting period : 30 June 2013

On 1st May 2013, Peter pays an insurance invoice of RM4,800 that covers the period from 1st May 2013 to 30th April 2014.

Suggested Solutions

1) A period that covers from 1st July 2012 to 30th June 2013

2) Number of months that relate to the accounting period

May 2013 and June 2013

= 2 months

3) Number of months that do not relate to the accounting period

The total months for which the expense item relates to

minus

number of months that relate to the accounting period

Therefore,

12 months - 2 months = 10 months (the prepayment period)

4) Calculating the prepayment amount

10 months / 12 months * RM4,800 = RM4,000

Accounting Entries

Prepaid Insurance Account

RM

6/30/2013 Insurance 4,000 6/30/2013 Balance c/d

Insurance Account

RM

5/1/2013 Bank 4,800 6/30/2013 Prepaid Insurance

6/30/2013 Profit & Loss Account

On 1st May 2013, Peter pays an insurance invoice of RM4,800 that covers the period from 1st May 2013 to 30th April 2014.

RM

Balance c/d 4,000

RM

Prepaid Insurance 4,000

Profit & Loss Account 800

Prepayments - Expense

Example 2

Accounting period : 30 June 2013

On 1st April 2013, Peter pays an insurance invoice of RM4,800 that covers the period from 1st April 2013 to 31st March 2014.

Suggested Solutions

1) 1st July 2012 to 30th June 2013 (Accounting Period)

2) Months that relate to the accounting period

April 2013, May 2013 and June 2013


= 3 months

4) Number of months that do not relate to the accounting period

The total months for which the expense item relates to

MINUS

Number of months that relate to the accounting period

12 months - 3 months = 9 months

5) Prepayment amount (i.e. the number of months that do not relate to the accounting period)

9 months / 12 months * RM4,800 = RM3,600

Accounting Entries


RM

6/30/2013 Insurance 3,600 6/30/2013

Insurance Account

RM

4/1/2013 Bank Account 4,800 6/30/2013

6/30/2013

On 1st April 2013, Peter pays an insurance invoice of RM4,800 that covers the period from 1st April 2013 to 31st March 2014.

5) Prepayment amount (i.e. the number of months that do not relate to the accounting period)


RM

Balance c/f 3,600

RM

Prepaid Insurance 3,600

Profit & Loss Account 1,200

Prepayments - Income

Example 3

Accounting period : 30th June 2013

On 30th June 2013, Peter raised a sales invoice for RM3,000 but the goods were supplied on 2nd July 2013

Note : In this case, a Deferred Income account should be used.

Accounting entries

Sales Account

RM

6/30/2013 Deferred Income 3,000 6/30/2013 Profit & Loss Account

Deferred Income Account

RM

6/30/2013 Balance c/f 3,000 6/30/2013 Sales Account

Reasoning

The above sales invoice of RM3,000 was issued in the accounting year, June 2013.

However, as the goods were delivered after the accounting year, June 2013, the sales invoice of RM3,000 should be

taken up in the accounting year June 2014.

Conclusion

The sales invoice of RM3,000 relates to the accounting period of 30 June 2014 but not 30 June 2013 as the goods

were delivered after 30 June 2013 i.e 2nd July 2013.

On 30th June 2013, Peter raised a sales invoice for RM3,000 but the goods were supplied on 2nd July 2013

RM


RM

Sales Account 3,000

However, as the goods were delivered after the accounting year, June 2013, the sales invoice of RM3,000 should be

The sales invoice of RM3,000 relates to the accounting period of 30 June 2014 but not 30 June 2013 as the goods

Prepayments - Income

Example 4


On 30th June 2013, Peter raised a sales invoice for RM3,000 but the goods were supplied on 2nd September, 2013

Note : In this case, a Deferred Income account should be used.

Accounting entries

Deferred Income Account

RM

6/30/2013 Balance c/d 3,000 6/30/2013 Sales Account

Sales Account

RM

6/30/2013 Deferred Income Account 3,000 6/30/2013 Profit & Loss Account

Reasoning

The above sales invoice of RM3,000 was issued in the accounting year, June 2013. However, as the goods were delivered after

the accounting year June 2013, the sales invoice of RM3,000 should be taken up in the accounting year June 2014

Conclusion

The sales invoice of RM3,000 relates to the accounting period of 30 June 2014 but not 30n June 2013 as the goods were delivered

after 30th June 2013 i.e. 2nd September, 2013

On 30th June 2013, Peter raised a sales invoice for RM3,000 but the goods were supplied on 2nd September, 2013

RM

Sales Account 3,000

RM


The above sales invoice of RM3,000 was issued in the accounting year, June 2013. However, as the goods were delivered after

the accounting year June 2013, the sales invoice of RM3,000 should be taken up in the accounting year June 2014

The sales invoice of RM3,000 relates to the accounting period of 30 June 2014 but not 30n June 2013 as the goods were delivered

Accruals - Expense

Example 5

Accounting period : 3oth June 2013

Peter receives an invoice for the rental covering the period from 1st May 2013 to 31st July 2013 amounting to RM3,600

on 5th July 2013.

Suggested Solutions

1) Months that relate to the accounting year

May 2013 and June 2013

2) Number of months that relate to the accounting year

= 2 months

3) Calculation of the accruals amount

2 months / 3 months = RM3,600 = RM2,400

Accounting Entries

Accrued Rental Account

RM

6/30/2013 Balance c/d 2,400 6/30/2013 Rental Account

Rental Account

RM

6/30/2013 Accrued Rental Account 2,400 6/30/2013 Profit & Loss Account

Peter receives an invoice for the rental covering the period from 1st May 2013 to 31st July 2013 amounting to RM3,600

RM

Rental Account 2,400

RM


Accruals - Expense

Example 6


Peter receives a rental invoice for the period covering from 1st April 2013 to 30th June 2013 amounting

to RM3,600 on the 15th July 2013.

Suggested solutions

1) Months that relate to the accounting period

April 2013, May 2013 and June 2013


= 3 months

3) Calculation of the accruals amount

3 months (accrued rental) / 3 months (total months of which the rental relates to) * RM3,600

= RM3,600

Accounting entries

Accrued Rental Account

RM

6/30/2013 Balance c/d 3,600 6/30/2013 Rental Account

Rental Account

RM

6/30/2013 Accrued Rental Account 3,600 6/30/2013 Profit & Loss Account

Peter receives a rental invoice for the period covering from 1st April 2013 to 30th June 2013 amounting

3 months (accrued rental) / 3 months (total months of which the rental relates to) * RM3,600

RM

Rental Account 3,600

RM


Accrued - Income

Example 7


Peter delivered goods worth RM20,000 on 31st May 2013

However, the sales invoice was raised on 31st July 2013

Note : In this case, an accrued income account should be used.

Accounting entries

Accrued Income Account

RM

6/30/2013 Sales Account 20,000 6/30/2013 Balance c/d

Sales Account

RM

6/30/2013 Profit & Loss Account 20,000 6/30/2013 Accrued Income Account

Reasonings

Although the sales invoice was issued on 31st July 2013, i.e after 30th June 2013, the goods were delivered on or before 30th June 2013.

Therefore, the income should be recognised in the accounting period ended 30th June 2013

Conclusions

An adjustment should be made in the accounts to account for the sales invoice issued after the accounting period (i.e. 3oth June 2013) as it

relates to this accounting period on the basis that these goods were delivered on or before the accounting period ended 30th June 2013.

RM

Balance c/d 20,000

RM

Accrued Income Account 20,000

Although the sales invoice was issued on 31st July 2013, i.e after 30th June 2013, the goods were delivered on or before 30th June 2013.

An adjustment should be made in the accounts to account for the sales invoice issued after the accounting period (i.e. 3oth June 2013) as it

relates to this accounting period on the basis that these goods were delivered on or before the accounting period ended 30th June 2013.

Accrued - Income

Example 8


Peter delivered goods worth RM20,000 on 29th June 2013

However, the sales invoice was raised on 31st August 2013

Note: In this case, an accrued income account should be used to do the necessary recording.

Accounting entries

Accrued Income Account

RM

6/30/2013 Sales Account 20,000 6/30/2013 Balance c/d

Sales Account

RM

6/30/2013 Profit & Loss Account 20,000 6/30/2013 Accrued Income Account

Reasonings

Although the sales invoice was issued on 31st August 2013, the goods were delivered on 29th June 2013. Therefore, the sales invoice

of RM20,000 should be recognised in the accounting period 30th June 2013

Conclusions

An adjustment should be made in the accounts to account for the sales invoice issued on 31st August 2013 to include it into the accounting

period ended 30/6/2013 as the goods were delivered on or before 30/6/2013 i.e. on 29th June 2013

Note: In this case, an accrued income account should be used to do the necessary recording.

RM

Balance c/d 20,000

RM

Accrued Income Account 20,000

Although the sales invoice was issued on 31st August 2013, the goods were delivered on 29th June 2013. Therefore, the sales invoice

An adjustment should be made in the accounts to account for the sales invoice issued on 31st August 2013 to include it into the accounting

period ended 30/6/2013 as the goods were delivered on or before 30/6/2013 i.e. on 29th June 2013

Documents

Accruals & Prepayments - Example 2