Accruals & Prepayments

PRC 4 Introduction to Accounting Topic 7: Accruals prepayments Daniyal Zahid butt, ACA
1. BASIC CONCEPT
ACCRUAL (MATCHING) CONCEPT
Accrual concept is the most fundamental principle of accounting which requires:
1. recording income when they are earned and not when they are received in cash, and
2. recording expenses when they are incurred and not when they are paid.
Cash basis vs. Accrual basis

• Under the cash basis of accounting,
income and expenses are reported in financial statements when the cash is received or paid.
• Under the accrual basis of accounting,
expenses are matched with the related income and are reported when the expense
is incurred, not when the cash is paid.
• Conclusion
The accrual basis of accounting gives a better measurement of profitability than does the
cash basis because accrual basis matches revenue with expenses that an entity incurred to earn it.
2. EXPENSES
Accrued expense
• These are expenses incurred but not paid by the end of an accounting period.
• The expense must be recorded, even if it has not been paid yet, as it relates to the period
in which it was incurred; and
• the amount unpaid should be recorded as a liability (Expenses Payable).
On payment of expense during accounting period
Debit Expense account
Credit Cash / Bank
Period end adjustment for expenses incurred but not yet paid
Credit Accrued expenses (a liability)
At start of next accounting period, reversal of period end adjustment is needed

Debit Accrued expenses
Credit Expense account
Questions:
1 Rent of building is Rs. 300,000 per year. Mr. X paid Rs. 250,000 in 2019 and remaining
payment will be made in 2020. Pass necessary journal entries for the year 2019
2 A business pays salaries of Rs. 50,000 per month in arrears. During the year 2019,
Salaries for 11 months had been paid from the business bank account and 1-month salary
will be paid in next year. Pass necessary journal entries for the year 2019
3 Rent of building is Rs. 600,000 per year. Mr. X paid Rs. 500,000 in 2019 and remaining
payment will be made in 2020. Pass necessary journal entries for the year 2019
4 A business pays salaries of Rs. 100,000 per month in arrears. During the year 2019,
Salaries for 11 months had been paid from the business bank account and 1-month salary
will be paid in next year. Pass necessary journal entries for the year 2019
5 Akmal set up in business on 1 January 2019. The business has a 31 December year end.
The business acquired a shop on rent on 1 February. Rent is paid half yearly in arrears
Monthly rent is Rs. 20,000
Prepare rent expense account for the year ended 2019
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6 Akmal set up in business on 1 January 2019. The business has a 31 December year end.
The business acquired a shop on rent on 1 February. Rent is paid half yearly in arrears
Monthly rent is Rs. 40,000
Prepare rent expense account for the year ended 2019
Multiple choice questions:

1 An accrual is:
(a) An expense relating to next year but not paid in current year
(b) An expense relating to the current year and paid within current year
(c) An expense relating to the current year but not paid in current year
(d) An expense relating to next year and already paid in current year
2 Staff salary remaining unpaid as at the year-end should be accounted for as:
(a) Prepaid salary (debit) and Staff salary expense (credit)
(b) Staff salary expense (debit) and Cash (credit)
(c) Accrued Salary (debit) and Staff salary expense (credit)
(d) Staff salary expense (debit) and accrued salary (credit)
3 Expenses relevant to the accounting period which remain unpaid by period end should be:
(a) Included with expenses paid and shown as an asset at the period end
(b) Ignored until they are paid for in the next period
(c) Deducted from amount already paid and shown as a liability at the period end
(d) Include in with the expenses and shown as a liability at the period end
4 On year end a business has outstanding electricity bills of Rs. 15,000. During the year
electricity bills paid are Rs. 190,000.
What adjustment will be required to utilities expense account regarding the outstanding bills?
(a) Cr Rs. 15,000 (c) No impact
(b) Dr Rs. 15,000 (d) Dr Rs. 190,000
5 A business has a beginning utilities accrual of Rs. 50,000, an ending accrual of Rs. 60,000, and during
the year, it pays for utilities of Rs. 80,000. What is the amount of utilities expense?
(a) Rs. 70,000 (c) Rs. 90,000
(b) Rs. 80,000 (d) Rs. 140,000
6 A business pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent
was increased from Rs. 150,000 per year to Rs. 180,000 per year as from 1 October 2007.
What rent expense and accrual should be included in the company’s financial statements
for the year ended 31 January 2008?
Rent expense Rs. Accruals Rs.
(a) 110,000 10,000
(b) 80,000 15,000
(c) 160,000 15,000
(d) 100,000 10,000
7 Sitara Industries has taken a loan from Crescent Bank. Interest on the loan is payable every quarter i.e.
on March 31, June 30, September 30 and December 31. Face amount of the loan is 500,000 and the rate
of interest is 10% per annum. Due to financial problems, two instalments were not paid on September
30 and December 31.
What is the amount of the interest liability to be shown in the Statement of Financial
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Position prepared as on December 31?
Rs. ___________
8 F Limited year-end is 30 September. On 1 January 2016 the organization took out a loan of Rs. 100,000
with annual interest of 12%. The interest is payable in equal instalments on the first day of April, July,
October and January in arrears.
How much should be charged to P&L for the year ended 30 September 2016, and how
much should be accrued on the statement of financial position?
Profit or loss Statement of financial position
(a) Rs. 12,000 Rs. 3,000 accrual
(b) Rs. 9,000 Rs. 3,000 accrual
(c) Rs. 9,000 Nil
(d) Rs. 6,000 Rs. 3,000 prepayment
9 A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent
was increased from Rs. 90,000 per year to Rs. 120,000 per year as from 1 October 2012.
What rent expense and accrual should be included in the company's financial statements
for the year ended 31 January 2013?
Rent Expense (Rs.) Accrual (Rs.)
(a) 100,000 20,000
(b) 100,000 10,000
(c) 97,500 10,000
(d) 97,500 20,000
Prepaid expense:
• This is cash paid in advance for expenses to be incurred after the end of an accounting period.
• The amount that relates to next accounting period is not an expense for this period and must
be presented as an asset (Prepayments).
On payment of expense during accounting period
Credit Cash / Bank
Period end adjustment for expenses not yet incurred and paid in advance
Debit Prepaid expenses (an asset)
Credit Expense account

Credit Prepaid expenses
Questions:
1 Mr. A acquired building on 1 July 2019 and paid a yearly rent of Rs. 450,000 in advance
on that date. The accounting year of Mr. A ends on 31 Dec.
Pass necessary journal entries for the year 2019
2 Mr. B obtained fire insurance policy on 1 Sep 2019 and paid annual insurance premium
of Rs. 360,000 on that date. The accounting year of Mr. B ends on 31 Dec.
3 Mr. A acquired building on 1 July 2019 and paid a yearly rent of Rs. 900,000 in advance
on that date. The accounting year of Mr. A ends on 31 Dec.
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4 Mr. B obtained fire insurance policy on 1 Sep 2019 and paid annual insurance premium
of Rs. 720,000 on that date. The accounting year of Mr. B ends on 31 Dec.
5 Mr. E prepare his accounts on 31 Dec each year. On 1-Mar-2019 he paid annual fire
insurance premium of Rs. 240,000 in advance
Prepare insurance expense account for the year ended 2019
6 Mr. E prepare his accounts on 31 Dec each year. On 1-Mar-2019 he paid annual fire
insurance premium of Rs. 480,000 in advance
Prepare insurance expense account for the year ended 2019

10 A prepayment can be defined as:
(a) Payments for expenses for that are not yet incurred and classified as non-current asset
(b) Expenses incurred but not yet paid and classified as current asset
(c) Payments for expenses for that are not yet incurred and classified as current asset
(d) None
11 Zahra determines at year end that Salaries paid during the year include Rs. 10,000 in advance.
What is the correct year end adjustment for advance salary to be made?
(a) Dr Salaries Rs. 10,000 Cr Advance salaries Rs. 10,000
(b) Dr Salaries Rs. 10,000 Cr Accrued salaries Rs. 10,000
(c) Dr Advance salaries Rs. 10,000 Cr Salaries expense Rs. 10,000
(d) No entry required
12 A business has paid an annual salary of Rs. 36,000 in advance to one of its employees on
31 August 2017.
What is the amount of prepaid salaries at the end of the year on 31 December 2017?
Rs. ___________
13 On 31 October 2019, a business pays annual insurance premium of Rs. 600,000.

What is the prepayment at the end of the year (31 December 2019)?
(a) Nil (c) Rs. 300,000
(b) Rs. 100,000 (d) Rs. 500,000
14 During the year, a business paid an electricity bill for Rs. 900,000 for the 3 months to November. The
year end of the business is 30 September, what accrual or prepayment is needed at the year end?
(a) Prepaid electricity = Rs. 600,000 (c) Prepaid electricity = Rs. 300,000
(b) Accrued electricity = Rs. 600,000 (d) Accrued electricity = Rs. 300,000
15 A tenant pays annual rent of Rs. 6,000. Payment is made quarterly in advance on 1 January, 1 April, 1
July and 1 October. Which of the following should be included in his accounts for the year ended 31
October 2001?
(a) Rs. 500 Accrual (c) Rs. 1,000 Accrual
(b) Rs. 500 Prepayment (d) Rs. 1,000 Prepayment
16 On 1 March 2017, Zahra pays an insurance premium of Rs. 2,400 for the period to 28 Feb 2018.
What is the charge to the statement of profit or loss for the year ended 31 October 2017
and prepayment in the Statement of Financial Position as at that date?
(a) Charge for SPL Rs. 800 and Prepayment Rs. Rs. 1,600
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(b) Charge for SPL Rs. 1,600 and Prepayment Rs. 800
(c) Charge for SPL Rs. 2,400 and Prepayment 0
(d) Charge for SPL 0 and Prepayment Rs. 2,400
17 Rent paid on 1 September 2017 for the year to 31 August 2018 was Rs. 15,000,
and rent paid on 1 September 2018 for the year to 31 August 2019 was Rs. 18,000.
What figure for rent expense should be shown in the statement of profit or loss for the
year ended 31 December 2018?
Rs. ___________
18
On the first day of Month 1, a business had prepaid insurance of Rs. 10,000. On the first day of Month 8,
it paid, in full, the annual insurance invoice of Rs. 36,000, to cover the following year.
The amount charged in P&L and the amount in the statement of financial position
Profit or loss SFP (Prepayment)
(a) Rs. 5,000 Rs. 24,000
(b) Rs. 22,000 Rs. 23,000
(c) Rs. 25,000 Rs. 21,000
(d) Rs. 36,000 Rs. 15,000
19 Details of a company’s insurance policy are shown below:

Premium for year ended 31 March 2016 paid April 2015 Rs. 10,800
Premium for year ended 31 March 2017 paid April 2016 Rs. 12,000
What figure should be included in the company’s financial statements for the year ended
30 June 2016?
Statement of P&L (Rs.) Statement of financial position (Rs.)
(a) 11,100 9,000 prepayment
(b) 11,700 9,000 prepayment
(c) 11,100 9,000 accrual
(d) 11,700 9,000 accrual
20 The annual rent expense for TTT for the period 1 July 2018 to 30 June 2019 is Rs. 35,000,
which is 25% more than the previous year. Rent expense is paid on 1 July.
What is the charge of rent expense in the statement of profit or loss for the year ended
31 December 2018?
(a) Rs. 28,000 (c) Rs. 35,000
(b) Rs. 31,500 (d) Rs. 7,000
Accrued expense & prepaid expense combined

Question 1
Adeel Engineering has two motor vehicles that are used within the business. The expenses of running these vehicles and
insuring these vehicles are recorded in the “Vehicle running expenses”. At May 1, 2003 there are repair bills accrued of
Rs. 4,780 and insurance that had been prepaid of Rs. 2,900.
During the year ended April 30, 2004 following transactions took place:
Date Description Rs.
30-Jun-23 Paid repair bills to workshop 6,980
01-Sep-23 Paid insurance for motor vehicles for the year to Aug 31, 2004 34,800
At April 30, 2004 there were repair bills unpaid totalling Rs. 3,560
Required:
Write up ledger accounts under single account system for the year ended April 30, 2004
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Effect on SOCI/SOFP
If not recorded Effect of adjustment/rectification
SOCI SOFP SOCI SOFP

↓ in
Accrued ↑ in net ↓ in net ↑ in current
↓ in exp current ↑ in exp
expense profit profit liability
liability
↓ in
Prepaid ↓ in net ↑ in net ↑ in current
↑ in exp current ↓ in exp
expense profit profit asset
asset

21 After finalizing the draft accounts of a business it was identified that salary expense
payable for Rs. 9,000 has been ignored. Salary expense paid during the year was Rs. 110,000.
What will be the impact of recording the salaries payable?
(a) Profit will be reduced by Rs. 9,000
(b) Profit will be increased by Rs. 9,000
(c) Profit will be reduced by Rs. 110,000
(d) Profit will be increased by Rs. 110,000
22 Atif finalized his draft accounts and ignored a prepayment for Rs. 100 and accrued expense
Rs. 300. What will be the impact on profit for the year?
(a) Understated by Rs. 100 (c) Overstated by Rs. 200
(b) Overstated by Rs. 100 (d) Understated by Rs. 200
23 After finalizing the draft accounts Arsalan identified that he has treated prepaid insurance
of Rs. 1,000 as accrued expense. What will be the impact of correction?
(a) Profit will be increased by Rs. 2,000 (c) Profit will be reduced by Rs. 1,000
(b) Profit will be increased by Rs. 1,000 (d) Profit will be reduced by Rs. 2,000
24 An entity’s draft accounts for the year to 31st October 2015 report a loss of Rs. 1,486. When the
assistant accountant prepared the accounts, she did not include an accrual of Rs. 1,625 and a
What is profit or loss for the year to 31st October 2015 following the inclusion of the
accrual and prepayment?
(a) A loss of Rs. 695 (c) A loss of Rs. 3,945
(b) A loss of Rs. 2,277 (d) A profit of Rs. 1,807
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3. INCOMES
Accrued income
· These is income earned but not received by the end of an accounting period.
· The income must be recorded, even if it has not been received yet, as it relates to the period in
which it was earned and
· the amount to be received should be recorded as an asset (Income Receivable).
On receipt of income during accounting period
Debit Cash / Bank
Credit Income account
Period end adjustment for income not yet received
Debit Accrued income (an asset)
Debit Income account
Credit Accrued income (Current asset)
Questions:
1 Mr. X rents out part of its premises on an yearly rent of Rs. 150,000. Mr. X received
Rs. 130,000 from tenant in 2019 and remaining payment will be made in 2020.
2 Mr. W receives interest of Rs. 10,000 on bank deposit for the month of December 2019 on
3rd January 2020. ABC LTD has an accounting year end of 31st December 2019.
3 Mr. X rents out part of its premises on an yearly rent of Rs. 300,000. Mr. X received
Rs. 260,000 from tenant in 2019 and remaining payment will be made in 2020.
4 Mr. W receives interest of Rs. 20,000 on bank deposit for the month of December 2019 on
3rd January 2020. ABC LTD has an accounting year end of 31st December 2019.
5 Jugno developers has 31 December year end. It rents out its building on 1 June 19.
Rent is payable after 3 months in arrears and rent payment received in business
bank account in 2019 are as follows:
• 31 August Rs. 9,500
• 30 November Rs. 9,500
• The next rent receipt (at the end of February 2020)
is expected to be Rs. 10,200 due to rise in prices.
Prepare rent income account for the year ended 2019
6 Jugno developers has 31 December year end. It rents out its building on 1 June 19.
Rent is payable after 3 months in arrears and rent payment received in business
bank account in 2019 are as follows:
• 31 August Rs. 19,000
• 30 November Rs. 19,000
• The next rent receipt (at the end of February 2020)
is expected to be Rs. 20,400 due to rise in prices.
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25 Earned but not yet received income is treated as
(a) Asset (c) Capital
(b) Liability (d) Loss
26 On finalizing the draft accounts Minhas identified that he has Rs. 1,000 rental income
receivable. Rental income received and recorded during the year is Rs. 11,000.
What is the correct entry to record the accrued income?
(a) Dr Rental income Rs. 1,000 Cr Accrued income Rs. 1,000
(b) Dr Cash Rs. 12,000 Cr Rental income Rs. 12,000
(c) Dr Cash Rs. 11,000 Cr Rental income Rs. 11,000
(d) Dr Accrued income Rs. 1,000 Cr Rental income Rs. 1,000
27 XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011
on 3rd January 2012. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry for such transaction on year end December 2011?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and interest receivable(credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
28 XYZ Ltd. receives interest of Rs. 100,000 on bank deposit for the month of December 2011
on 3rd January 2011. XYZ Ltd has an accounting year end of 31st December.
What would be the accounting entry when subsequently on 3rd January, payment for interest
is received?
(a) Prepaid interest (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
(c) Cash (debit) = Rs.100,000 and Prepaid interest (credit) = Rs.100,000
(d) Interest receivable (debit) = Rs.100,000) and interest income (credit) = Rs.100,000
29 A business had deposited Rs. 500,000 into an annual fixed deposit on May 1, 2018.
Interest is accrued quarterly on March 31, June 30, September 30 and December 31 each
year. Interest will be paid only on maturity. Monthly interest amount is Rs. 3,000.
What amount of interest receivable should be shown in the Statement of Financial Position
prepared as on December 31, 2018?
Rs. ___________
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Prepaid income / Unearned income
· This is cash received in advance for income yet to be earned at the end of an accounting period.
· The amount that relates to next accounting period is not an income for this period and must be
presented as a liability (unearned income / advance).
On receipt of income during accounting period
Debit Cash / Bank
Period end adjustment for income not yet earned and received in advance
Debit Income account
Credit Prepaid income / Unearned income (a liability)
Debit Unearned income
Questions:
1 Mr. T received advance rent from its tenant of Rs. 300,000 on 31st December 2019 in
respect of office rent for the 2020. Mr. T has an accounting year end of 31st December 2019.
Pass necessary journal entries for the year 2019 & 2020.
2 Mr. S received advance rent from its tenant of Rs. 120,000 on 1st September 2019 for next
12 months. Mr. S has an accounting year end of 31st December 2019.
3 Mr. T received advance rent from its tenant of Rs. 600,000 on 31st December 2019 in
respect of office rent for the 2020. Mr. T has an accounting year end of 31st December 2019.
4 Mr. S received advance rent from its tenant of Rs. 240,000 on 1st September 2019 for next
12 months. Mr. S has an accounting year end of 31st December 2019.
5 Mr. P prepare his accounts on 31 Dec each year. Following transactions occur in relation
to rent income for the year 2019.
01-Jan Prepaid rent income Rs. 150,000
01-Mar Received annual rent Rs. 480,000 of building A in advance
01-Jul Received annual rent Rs. 200,000 of building B in advance
6 Mr. P prepare his accounts on 31 Dec each year. Following transactions occur in relation
to rent income for the year 2019.
01-Jan Prepaid rent income Rs. 300,000
01-Mar Received annual rent Rs. 960,000 of building A in advance
01-Jul Received annual rent Rs. 400,000 of building B in advance

30 Which of the following is asset account?
(a) Prepaid expense (c) Unearned income
(b) Accrued expense (d) Rent payable
31 What is the treatment of Pre - received income in the Statement of Financial Position of
the business?
(a) Treated as a non – current asset (c) Treated as a non – current liability
(b) Treated as a current asset (d) Treated as a current liability
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32 Which of the following statements is incorrect?
(a) Income received in advance is a current liability
(b) Accrued income is a current asset
(c) Prepaid insurance is a current liability
(d) Salaries payable is a current liability
33 Unearned income is classified as

(a) Assets (c) Equity
(b) Liability (d) Loss
34 Which of the following is not true?

(a) An accrual is an amount owing at the end of a period; a prepayment is an
amount paid in advance
(b) An accrual is a liability; a prepayment is an asset
(c) An accrual is a liability; a prepayment is always a non-current asset
(d) An accrual is a current liability; a prepayment is a current asset
35 ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December
in respect of office rent for the following year. ABC Ltd. has an accounting year end of
31st December. What accounting entry is to be passed in this year?
(a) Cash (debit) = Rs.1 million and Advance rent – liability (credit) = Rs.1 million
(b) Cash (debit) = Rs.1 million and Accrued rent (credit) = Rs.1 million
(c) Cash (debit) = Rs.1 million and Rent income (credit) = Rs.1 million
(d) None
36 ABC Limited receives advance rent from its tenant of Rs.1 million on 31st December in
respect of office rent for the following year.
What would be the accounting entry in the following year?
(a) Accrued rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(b) Advanced rent (debit) = Rs.1 million and rental income (credit) = Rs.1 million
(c) Accrued rent (debit) = Rs.1 million and prepaid rent (credit) = Rs.1 million
(d) None
37 X Ltd rents its building to Y Ltd. At 31st December 2018, Y Ltd owed Rs. 4,500 for rent, but at 31st
December 2019, had paid Rs. 3,200 in advance. During the year X Ltd had received Rs. 17,100 in rental
What is the rental income to be shown in the Statement of Profit or Loss of X Ltd for the
year ended 31st December 2019?
Rs. __________________________
38 Helix Corporation has sublet part of its office and in the year ended 30 November 2008
the rent receivable was:
Until 30 June 2008 Rs. 9,000 per year
From 1 July 2008 Rs. 12,000 per year
Rent was received quarterly in advance on 1 January, April, July, and October each year.
What amounts should appear in the company’s financial statements for the year ended
30 November 2008?
Rental income Statement of Financial Position
(a) Rs. 10,800 Rs. 1,000 in sundry payables
(b) Rs. 10,900 Rs. 1,000 in sundry payables
(c) Rs. 10,250 Rs. 1,000 in sundry receivables
(d) Rs. 9,900 Rs. 2,000 in sundry receivables
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39 Jasia has taken a loan of Rs. 250,000 from HBL as on 1st March 2018 for the construction of her office
building. The construction is completed as on June 30, 2018. She rented a portion of her office for Rs.
4,500 per month on July 1. Interest is accrued and paid annually @ 15% per annum on December each
What amount of interest expenses and rent income should be shown in the statement of
Profit or Loss of Jasia’s business prepared on December 31, 2018?
(a) Interest expense Rs. 54,000, Rental income Rs. 37,500
(b) Interest expenses. 37,500, Rental income Rs. 54,000
(c) Interest expense Rs. 31,250, Rental income Rs. 27,000
(d) Interest expenses. 37,500, Rental income Rs. 4,500
40 In the year to 31 December 2018, Saira received Rs. 50,800 rental income.
The amounts of rent received in advance and due in arrears were as follows:
31-Dec-18 31-Dec-17
Rent received in advance 4,000 3,000
Rent due in arrears (accrued) 2,500 1,700
What figure for rental income should be recorded in the statement of profit or loss for the
year ended 31 December 2018?
(a) Rs. 50,800 (c) Rs. 54,500
(b) Rs. 50,600 (d) Rs. 56,000
41 A business owns two properties which it rents to tenants. In the year ended 31 December 2016, it
received Rs. 278,000 in respect of property 1 and Rs. 160,000 in respect of property 2. Balance on the
rental accounts were as follows:
31-Dec-16 31-Dec-15
Property 1 13,400 Dr 12,300 Cr
Property 2 6,700 Cr 5,400 Dr
What amount should be credited to the Statement of P&L and OCI for the year ended
31 December 2016 in respect of rental income?
(a) Rs. 451,600 (c) Rs. 939,200
(b) Rs. 738,000 (d) Rs. 858,600
42 Zameen, a property company, received cash totalling Rs. 838,600 from tenants during the year ended
31 December 2016. Figures for rent in advance and in arrears at the beginning and at the end of year
2015-12-31 2016-12-31
Rs. Rs.
Rent receive in advance 102,600 88,700
Rent in Arrears (all subsequently received) 42,300 48,400
What amount should appear in company’s Statement of P&L for the year ended 31 Dec 2016 for rental
income?
(a) Rs. 818,600 (c) Rs. 939,200
(b) Rs. 738,000 (d) Rs. 858,600
Effect on SOCI & SOFP

If not recorded Effect of adjustment/rectification
SOCI SOFP SOCI SOFP
↓ in
Accrued ↓ in ↓ in net ↑ in ↑ in net ↑ in current
current
income income profit income profit asset
asset
↓ in
Prepaid ↑ in ↑ in net ↓ in ↓ in net ↑ in current
current
income income profit income profit liability
liability
Page 11 of 16

43 Which of the following statements is not true?
(a) Accrued expense decrease profit (c) A prepaid expense is an asset
(b) Accrued income decreases profit (d) All of the above statements are true
44 The draft year end accounts were prepared without adjusting prepayment for rent income of Rs. 970.
When the adjustment is made, which of the following would be effect thereof?
(a) Profit increased by Rs. 970 and Liability increased by Rs. 970
(b) Profit decreased by Rs. 970 and Liability increased by Rs. 970
(c) Profit increased by Rs. 970 and assets increased by Rs. 970
(d) Profit increased by Rs. 970 and assets decreased by Rs. 970
45 An entity prepared the draft end year accounts, but did not adjust these for a prepaid income
of Rs. 1,500 and an accrued income of Rs. 400.
How will profit and net assets be affected by including the prepayment and accrual?
NET PROFIT WILL NET ASSETS WILL
(a) Reduce by Rs. 1,100 Reduce by Rs. 1,100
(b) Reduce by Rs. 1,900 Increase by Rs. 1,900
(c) Increase by Rs. 1,100 Increase by Rs. 1,100
(d) Reduce by Rs. 1,900 Reduce by Rs. 1,900
Material inventory (packing material/stationery/oil etc)

(i) Inventory purchased shall be recorded as other expense
(ii) Cost of unused inventory at period end shall be transferred from expense to current asset
Q1 Packing material purchased during the year Rs. 700 on cash and Rs 300 on credit
Prepare expense account
Q2 Sales supplies purchased during the year Rs. 300 on cash and Rs 500 on credit
Unused sale supplies were of Rs. 200
Q3 Stationery purchased during the year Rs. 200 on cash and Rs 800 on credit
Unused stationery at year end was of Rs. 300 out of which items of Rs. 50 were damaged
having no sales value

46 At 31 March 2012 a company had oil in hand to be used for heating costing Rs. 8,200 and an unpaid
heating oil bill for Rs. 3,600. At 31 March 2013 the heating oil in hand was Rs. 9,300 and there was an
outstanding heating oil bill of Rs. 3,200. Payments made for heating oil during the year ended 31 March
2013 totalled Rs. 34,600.
Based on these figures, what amount should appear in the company's Statement of Profit
or Loss for heating oil for the year?
(a) Rs. 23,900
(b) Rs. 36,100
(c) Rs. 45,300
(d) Rs. 33,100
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1 (c) An expense relating(Answers)
to the current year but not paid in current year
2 (d) Staff salary expense (debit) and accrued salary (credit)
3 (d) Include in with the expenses and shown as a liability at the period end
The expense must be recorded (debited) under matching concept in the year it
4 (b)
has been incurred, even if the bill is outstanding.
Utilities
Particulars Rs. Particulars Rs.
Cash 80,000 b/d 50,000
5 (c)
c/d 60,000 PL 90,000
140,000 140,000
Rent
Rs. Rs.
expense
1st Feb 2007 150,000/12
– 30 Sep 100,000
x8
2007
6 (c)
1st Oct2007
180,000/12
– 31 Jan 60,000
x4
2008
160,000
Accrued rent = 180,000/12 = Rs. 15,000
Interest per quarter = Rs. 500,000x10%=Rs. 50,000/4 Quarters
7 Rs. 25,000
= Rs. 12,500x2 quarters =Rs. 25,000
Rs.
Interest expense for the
year 100,000 x 12% x 9,000
8 (b) 9/12
Payable Quarter ending
3,000
30 Sep 2016 12,000 / 4
Rent
Rs.
expense
Rent for 01
Rs
Feb 2012 to 60,000
90,000/12x8
30 Sep 2012
9 (b)
Rent for 01 Rs.
Oct 2012 to 120,000/12x 40,000
31 Jan 2013 4
100,000
Accrued rent is for January 2013= Rs. 10,000
Payments for expenses for that are not yet incurred and classified as current
10 (c)
asset.
Advance salaries are prepayment and an asset, so must be debited. This
11 (c)
reduces the current year expense, which shall be credited.
Advance salary = Rs. 36,000 x 8 /12 = 24,000
12 Rs. 24,000
Four month salary is no more prepaid (services have been received against that).
Page 13 of 16
13 (d) Rs. 600,000 x 10/12(Answers)
months = Rs. 500,000
Prepayment (as paid in advance)
14 (a)
Rs. 900,000 x 2/3 months = Rs. 600,000
15 (d) Prepayment = 6000/4 = 1,500/3 x 2 months = Rs. 1,000
Charge for SPL = Rs. 2,400/12x8 = Rs. 1,600
16 (b)
Prepayment = Rs. 24,00 - Rs. 1,600= Rs. 800
Rent for Jan to Aug 2018 = (Rs. 15,000/12x8) = Rs. 10,000
17 Rs. 16,000 Rent for Sep to Dec 2018= (Rs. 18,000/12x4) =Rs. 6,000
Total = Rs. 16,000
Insurance expense a/c
Date Particulars Rs. Date Particulars Rs.
b/d 10,000 SPL 25,000
18 (c) c/d 36,000
Cash 36,000 21,000
/ 12 x 7
46,000 46,000
Insura
nce
Rs.
expens
e
1 July
2015
10,800/12 x
to 31 8,100
9
Mar
19 (a)
2016
01
April
2016
12,000/12x3 3,000
to 30
June
2016
11,100
Prepayment = 12,000/12 x 9 = 9,000
Rent Rs. Rs.
1 Jan 18 – (35,000/100
14,000
30 June 18 x 125)/12 x
20 (b) 6
1 July 18 –
35,000/12x6 17,500
31 Dec 18
31,500
Rs. 110,000 is already recorded only further Rs. 9,000 is to be recorded as

21 (a)
expense on accrual basis, reducing the profit by Rs. 9,000.
Prepayments are deducted from expenses and profit is increased and accruals
22 (c) are added to the expenses and profit is reduced as a result. Therefore, the profit
has been overstated due to omissions.
Page 14 of 16
Rs. 1,000 accruals will be reversed (reduction in expense and increase in profit) &
(Answers)
23 (a) Rs. 1,000 prepayment will be recorded (reduction in expense and increase in
profit)
24 (b) = 1,486+1,625-834= 2,277
25 (a) Liability
Accrued income is income receivable and must be recorded as an asset and
26 (d)
corresponding increase in income (credited).
Interest receivable (debit) = Rs.100,000) and interest income (credit) =
27 (d)
Rs.100,000
28 (b) Cash (debit) = Rs.100,000 and Interest income (credit) = Rs.100,000
= Rs. 3,000x8 months = Rs. 24,000
29 Rs. 24,000
All interest will be received on maturity, therefore, all is accrued.
30 (a) Prepaid expense is an asset account. All other are liability account.
Income received in advance is an obligation to deliver goods or services in future
31 (d) and therefore a liability. As such advances are not for long term, it is treated as
current liability.
Prepaid insurance is an asset as it is right to receive benefit from insurance
32 (c)
services in the future.
33 (b) Liability
34 (c) An accrual is a liability; a prepayment is always a non-current asset
Cash (debit) = Rs.1 million
35 (a)
Advance rent – liability (credit) = Rs.1 million
Advanced rent (debit) = Rs.1 million
36 (b)
Rental income (credit) = Rs.1 million
Rent income a/c

Rs.
b/d 4,500 cash 17,100
37 9,40
SPL 9,400
0
c/d 3,200
17,100 17,100
Rental
Rs. Rs.
income
1st Dec 2007
– 30 June 9,000/12 x 7 5,250
2008
38 (c)
1st July 2008
12,000 12 x
– 30 Nov 5,000
5
2008
10,250
One month rent is receivable; Rs 12,000/12 = Rs. 1,000
Interest expense = (Rs. 250,000x15%) x10/12=Rs. 31,250
39 (c)
Rental income = Rs. 4,500 x 6 = Rs. 27,000
Rent
Particulars Rs. Particulars Rs.
Bal. b/d Bal. b/d
1,700 3,000
(accrued) (Advance)
40 (b)
Page 15 of 16
Profit or (Answers) Cash
40 (b) 50,600 50,800
loss received
Bal. c/d Bal. c/d
4,000 2,500
(Advance) (Accrued)
56,300 56,300
Rent income a/c

b/d P2 5,400 b/d P1 12,300
Cash
41 (a) 278,000+16
SPL 451,600 0,000 438,000
c/d P2 6,700 c/d P1 13,400
463,700 463,700
Rent income a/c

b/d 42,300 b/d 102,600
42 (d) SPL 858,600 Cash 838,600
c/d 88,700 c/d 48,400
989,600 989,600
43 (b) Accrued income increases profit

44 (b) Profit decreased by Rs. 970 and Liability increased by Rs. 970
45 (a) Net profit and net assets to be reduced by Rs. 1,100 i.e. 1,500 – 400
Heating oil a/c
b/d oil in b/d heating
8,200 3,600
hand oil bill
Cash 34,600 SPL 33,100
46 (d)
c/d heating c/d oil in
3,200 9,300
oil bill hand
46,000 46,000
Page 16 of 16

Accruals & Prepayments

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Accruals & Prepayments

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PRC 4 Introduction to Accounting Topic 7: Accruals prepayments Daniyal Zahid butt, ACA

Cash basis vs. Accrual basis

At start of next accounting period, reversal of period end adjustment is needed

Multiple choice questions:

At start of next accounting period, reversal of period end adjustment is needed

Multiple choice questions:

13 On 31 October 2019, a business pays annual insurance premium of Rs. 600,000.

19 Details of a company’s insurance policy are shown below:

Accrued expense & prepaid expense combined

SOCI SOFP SOCI SOFP

Multiple choice questions:

Multiple choice questions:

33 Unearned income is classified as

34 Which of the following is not true?

Effect on SOCI & SOFP

Multiple choice questions:

Material inventory (packing material/stationery/oil etc)

Multiple choice questions:

Rs. 110,000 is already recorded only further Rs. 9,000 is to be recorded as

Rent income a/c

Rent income a/c

Rent income a/c

43 (b) Accrued income increases profit

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