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

Expense accounts with accruals & prepayments

How do I complete an expense account?

• Put the opening balance on the correct side

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

• Put the amount paid on the debit side

  • Label this as cash or bank

• Put the amount due on the credit side

  • Label this as statement of profit or loss

• Put the closing balance on the correct side

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

Layout of an expense 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 expense 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 paid
  • the amount to transfer to the statement of profit or loss
  • the amount accrued or prepaid at the end of the year

Exam Hint You might be asked to complete an expense account which deals with two expenses together. You would complete this using the same method. You can combine the balances if they appear on the same side. If you combine them, it is good practice to show both values separately and the combined total. You can combine the entries for the statement of profit or loss in a similar way as shown in the following worked example.

Worked Example Yuzra combines rent and rates into one single ledger account.

On 1 January 2023

• $500 was owed for rent
• $800 was owed for rates

On 1 January 2024

• $400 was owed for rent
• $200 was prepaid for rates

During the year (2023)

• $4 900 was paid for rent by cheque
• $2 300 was paid for rates by cheque

Prepare the rent and rates account in the ledger for Yuzra 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 of profit or loss.

Answer:

Identify which side each amount needs to be posted to:

• On 1 January 2023, both amounts were owed by Yuzra

  • Therefore they represent liabilities
  • The opening balances will appear on the credit side

• On 1 January 2024, Yuzra owed rent

  • The opening balance for January 2024 will be on the credit side
  • Therefore the closing balance for December 2023 will be on the debit side

• On 1 January 2024, Yuzra had prepaid rates which represents an asset

  • The opening balance for January 2024 will be on the debit side
  • Therefore the closing balance for December 2023 will be on the credit side

Deal with the payments during the year:

• The payments for rent and rates will be on the debit side

  • Because they would appear on the credit side in the cash book

Calculate the amount that should be transferred to the statement of profit or loss for rent and rates

You can either do this by

• balancing the account for rent and rates separately
• or calculating how much should have been paid for the financial year

Here are the calculations to find the amounts due:

• Rent: $4 900 (amount paid)

  • • $500 (amount owed from last year)
  • • $400 (amount owed at end of this year)
  • = $4 800

• Rates: $2 300 (amount paid)

  • • $800 (amount owed from last year)
  • • $200 (amount prepaid for next year)
  • = $1 300

Final answer: Yuzra Rent and Rates Account

Final answer: Date	Final answer: Details	Final answer: $**	Final answer: Date	Final answer: Details	Final answer: $
Final answer: 2023 Final answer: Dec 31	Final answer: Bank Final answer:** Rent 4 900 Final answer: Rate 2 300 **	7 200	Final answer: 2023 Final answer: Jan 1	Final answer: Balance b/d Final answer:** Rent 500 Final answer: Rates 800 **	Final answer: 1 300
Final answer: Dec 31	Final answer: Balance c/d (rent)	Final answer: 400	Final answer: Dec 31	Final answer: Statement of profit or loss Final answer:** Rent 4 800 Final answer: Rates 1 300	6 100
			Final answer: Dec 31	Final answer: Balance c/d (rates)	Final answer: 200
		Final answer: 7 600			Final answer: 7 600
Final answer: 2024 Final answer: Jan 1	Final answer: Balance b/d (rates)	Final answer: 200	Final answer: 2024 Final answer: Jan 1	Final answer: Balance b/d (rent)	Final answer: 400