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Accruals and prepayments in the financial statements
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Expense accounts often have amounts owing or prepaid at both the start and end of the year. You need to adjust for all of them.
The adjustment formula
Expense for the year = amount paid − opening accrual + closing accrual + opening prepayment − closing prepayment
The opening accrual was last year's expense (paid this year), so subtract it.
The opening prepayment was paid last year for this year, so add it.
The opening accrual was last year's expense (paid this year), so subtract it.
The opening prepayment was paid last year for this year, so add it.
Example
Electricity: paid £4000 in the year. Owing at the start £300. Owing at the end £500.
Expense = 4000 − 300 + 500 = £4200.
Insurance: paid £2000. Prepaid at the start £200. Prepaid at the end £350.
Expense = 2000 + 200 − 350 = £1850.
Expense = 4000 − 300 + 500 = £4200.
Insurance: paid £2000. Prepaid at the start £200. Prepaid at the end £350.
Expense = 2000 + 200 − 350 = £1850.
In the statements
Income statement: the adjusted expense (or income) for the year.
Statement of financial position: closing accruals are other payables (current liabilities); closing prepayments are other receivables (current assets).
For income: income owing at the end is an other receivable; income received in advance is an other payable.
Statement of financial position: closing accruals are other payables (current liabilities); closing prepayments are other receivables (current assets).
For income: income owing at the end is an other receivable; income received in advance is an other payable.
Rent paid £9000. At the start of the year £750 was prepaid; at the end £1000 is prepaid. Find the rent expense.
- Add opening prepayment: 9000 + 750 = 9750
- Subtract closing prepayment: 9750 − 1000
Answer: £8750
Expense = paid − opening accrual + closing accrual + opening prepayment − closing prepayment. Closing accruals are other payables; closing prepayments are other receivables.
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