Income Accounts with Accruals & Prepayments (Cambridge International AS Accounting)

Income accounts with accruals & prepayments

How do I complete an income account?

• Put the opening balance on the correct side

  • Debit side if the amount is an accrual
  • Credit side if the amount is a prepayment

• Put the amount received on the credit side

  • Label this as cash or bank

• Put the amount due on the debit side

  • Label this as statement of profit or loss

• Put the closing balance on the correct side

  • Credit side if the amount is an accrual
  • Debit side if the amount is a prepayment

Layout of an income account showing the entries on each side for accruals and prepayments

Exam Hint Students sometimes get confused about where to put the closing balances. A good way to make sure that you put them on the correct side, is to also include the opening balances for the following year. Then the closing balances will be on the opposite side.

How do I calculate a missing value in an income account?

• You can use a ledger account to find any missing value

  • Fill in the amounts that you know on the correct sides
  • Find the missing value which balances the account

• You can use this method to find

  • the amount received
  • the amount to transfer to the statement of profit or loss
  • the amount accrued or prepaid at the end of the year

Worked Example Hussain receives rent from Sayid.

On 1 January 2023, Sayid owed Hussain three months’ rent.

On 1 March 2023, Hussain receives a cheque from Sayid for $8 400 for 16 months’ rent.

Prepare the rent receivable account in the ledger for Hussain for the financial year ended 31 December 2023. Balance the account and bring down the balances on 1 January 2024. Clearly show the amount that is transferred to the statement or profit or loss.

Answer:

Sayid paid for 16 months:

• 12 months for the financial year
• three months for the arrears at the start
• one month prepaid for the next year

Find the accrual at the start of the year.

• STEP 1: Divide the payment by 16 to get the monthly rent

$8 400 ÷ 16 = $525

• STEP 2: Multiply the monthly rent by 3 to find the accrual at the start of the year

$525 × 3 = $1 575

Find the amount due for the year ended 31 December.

• Multiply the monthly rent by 12

$525 × 12 = $6 300

Identify which side of the rent receivable account to post each transaction:

• The payment from Sayid will be credited to the rent receivable account

  • Because it will be debited to the cash book

• There is an accrual at the start of the year, which represents an asset

  • Therefore the opening balance will be on the debit side of the rent receivable account

• The amount for the year is credited to the statement or profit or loss

  • Therefore the rent receivable account will be debited

• There is a prepayment at the end of the year, which represents a liability

  • Therefore there will be an opening balance on the credit side for the next year
  • Therefore, the closing balance will be on the debit side for this year

Final answer: Hussain Rent Receivable Account

Final answer: Date	Final answer: Details	Final answer: $**	Final answer: Date	Final answer: Details	Final answer: **$
Final answer: 2023 Final answer: Jan 1	Final answer: Balance b/d	Final answer: 1 575	Final answer: 2023 Final answer: Jan 1	Final answer: Bank	Final answer: 8 400
Final answer: Dec 31	Final answer: Statement of profit or loss	Final answer: 6 300
Final answer: Dec 31	Final answer: Balance c/d	Final answer: 525
		Final answer: 8 400			Final answer: 8 400
			Final answer: 2024 Final answer: Jan 1	Final answer: Balance b/d	Final answer: 525