Cambridge IGCSE Accounting · 0452
Chapter 4: Accounting Procedures — Part 4
Section 4.3 · Other Payables and Other Receivables (Accruals and Prepayments)
This section deals with the adjustments required to ensure that the Income Statement only includes income earned and expenses incurred for the current financial year, regardless of when the actual cash was paid or received. This is a direct application of the Matching (Accruals) concept.
The Matching Principle
The Matching principle states that the revenue of a period must be matched against the expenses incurred to earn that revenue. For example, if a business owes rent at the end of the year, that rent must be included in this year’s expenses because the benefit of using the building occurred this year.
Adjustments for Expenses
- Prepaid Expenses (Other Receivables)
- Expenses paid in advance for a future period.
Action: Subtract from the total cash paid to find the expense for the current year.
SFP Classification: Current Asset. - Accrued Expenses (Other Payables)
- Expenses incurred during the period but not yet paid for.
Action: Add to the total cash paid.
SFP Classification: Current Liability.
Adjustments for Income
- Accrued Income
- Income earned during the period but not yet received.
Action: Add to the total cash received.
SFP Classification: Current Asset. - Prepaid Income (Income received in advance)
- Income received this year that relates to the next financial year.
Action: Subtract from the total cash received.
SFP Classification: Current Liability.
T-Account Format — Expenses
You must be able to “balance off” expense accounts to show the final amount transferred to the Income Statement.
Worked Example 1: Insurance Account (Expense)
- Prepaid at start of year: $50
- Accrued at start of year: $60
- Total paid during year (Bank): $500
- Prepaid at end of year: $30
- Accrued at end of year: $40
Insurance Account
| Debit | Credit | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| Jan 1 | Prepaid b/d | 50 | Jan 1 | Accrued b/d | 60 |
| Dec 31 | Bank | 500 | Dec 31 | Prepaid c/d | 30 |
| Dec 31 | Accrued c/d | 40 | Dec 31 | Profit & Loss | 500 |
| 590 | 590 | ||||
| Jan 1 | Prepaid b/d | 30 | Jan 1 | Accrued b/d | 40 |
Amount transferred to Income Statement = $500 (expense for the year). Prepaid $30 is a current asset; accrued $40 is a current liability.
Income Accruals and Prepayments
Worked Example 2: Rent Received Account (Income)
- Accrued income at start (b/d): $100
- Prepaid income at start (b/d): $80
- Total cash received during year: $3,000
- Accrued income at end (c/d): $60
- Prepaid income at end (c/d): $40
Rent Received Account
| Debit | Credit | ||||
|---|---|---|---|---|---|
| Date | Details | $ | Date | Details | $ |
| Jan 1 | Prepaid b/d | 80 | Jan 1 | Accrued b/d | 100 |
| Dec 31 | Accrued c/d | 60 | Dec 31 | Bank (cash received) | 3,000 |
| Dec 31 | Income Statement | 3,000 | Dec 31 | Prepaid c/d | 40 |
| 3,140 | 3,140 | ||||
Calculation: Cash $3,000 + Accrued c/d $60 − Accrued b/d $100 − Prepaid c/d $40 + Prepaid b/d $80 = $3,000 Revenue for the year.
Year-end journals: Dr Accrued Income $60; Cr Rent Received $60. Dr Rent Received $40; Cr Prepaid Income $40.
Accrued income c/d = current asset. Prepaid income c/d = current liability.
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