Adjustments for Accrued & Prepaid Income (Cambridge International AS Accounting)

Spec point — how to calculate and record the adjustments needed and the effect on financial statements in respect of: – accruals and prepayments of income and expenses

Adjustments for accrued & prepaid income

How do I record accruals and prepayments of income on the financial statements?

• Calculate the total amount that is due for the current year

  • See the revision note Accrued & Prepaid Income for more information

• Accrued income is an amount which has not yet been received at the end of the accounting period

• Prepaid income is an amount that is received in the current accounting period but relates to a future accounting period

• The total amount due for the year is the value included on the statement of profit or loss

  • If an income has an accrual then add that value to the balance of the account
  • If an income has a prepayment then **subtract **that value from the balance of the account

• The amounts of the** accruals or prepayments** are stated on the statement of financial position

  • The amount of an income that is accrued is treated as a current asset

    • Label it as other receivables

  • The amount of an income that is prepaid is treated as a current liability

    • Label it as other payables

Exam Hint To help remember whether an accrual or a prepayment of income is an asset or a liability, consider whether the business is still owed income. If it is, then it is an asset.

Exam Hint Where there are several accrued incomes, it is usual to show them all added as one figure on the statement of financial position called other receivables under current assets. Similarly, several prepaid incomes are added together as one figure called other payables under current liabilities.

Worked Example Savio is a trader. His financial year ends 30 September 2023.

On 1 January 2023, Savio rents out a part of his building to a trader who pays $2 400 upfront for 12 months of rent.

Savio receives commission, $375, every three months. On 30 September 2023, Savio has not yet received commission for the previous three months.

Prepare extracts of the financial statements to show how the rent received and commission received are treated.

Answer:

Rent:

Current financial period
O	N	D	J	F	M	A	M	J	J	A	S	O	N	D
	$2 400 rent for the year

• Calculate the rent per month

£2 400 ÷ 12 = $200

• Calculate the amount due for the financial year

  • 9 months included (J-F-M-A-M-J-J-A-S)

9 × $200 = $1 800

• This is the amount that will be stated on the statement of profit or loss

  • even though more has been received

• Identify the amount received in advance

  • 3 months prepaid (O-N-D)

3 × $200 = $600

• This will be listed as a current liability on the statement of financial position

Commission

• Calculate the commission per month

£375 ÷ 3 = $125

• Calculate the amount due for the financial year

12 × $125 = $1 500

• This is the amount that will be stated on the statement of profit or loss

  • even though not all of it has been received

• Identify the amount still owed

  • 3 months owing: $375
  • This will be listed as a current asset on the statement of financial position

Final answer: Savio Final answer: Statement of Profit or Loss (extract) for the year ended 30 September 2023
Final answer: Other income	Final answer: $**	Final answer: **$
Final answer: Rent	Final answer: 1 800
Final answer: Commission	Final answer: 1 500	Final answer: 3 300

Final answer: Savio Final answer: Statement of Financial Position (extract) at 30 September 2023
	Final answer: $
Final answer: Current assets
Final answer: Other receivables	Final answer: 375
Final answer: Current liabilities
Final answer: Other payables	Final answer: 600