Area D · Period-end adjustments

Accruals & prepayments

Accruals and prepayments make sure income and expenses sit in the correct period. Almost every trial-balance-to-financial-statements question in FA uses at least one of these. This note uses everyday language, clear journals, and numbers you can copy into practice.

What you must be able to do in the exam

Explain why we use the accruals basis (not only cash)
Calculate and journal accrued expenses and prepaid expenses
Calculate and journal accrued income and deferred (unearned) income
Show the correct figures in the SoPL and the SFP
Deal with an opening accrual or prepayment brought forward from last year

1. The big idea (one sentence)

Record income when you earn it and expenses when you incur them — not only when cash moves. That is the accruals (matching) idea you meet in the Conceptual Framework and in every set of FA statements.

Tutor tip

Ask two questions at year end: “Have we used a service we have not paid for yet?” and “Have we paid for something that belongs to next year?” Those two questions catch most accruals and prepayments.

2. Accrued expense (expense owed)

You have received a benefit this year, but you have not yet paid (or not fully invoiced). Example: electricity used in December, bill arrives in January; or rent for the last quarter still unpaid.

Journal at year end:
Debit Expense (SoPL — increase the charge for this year)
Credit Accrual (SFP — current liability)

Next period, when you pay, you typically debit the liability (and any extra expense if the bill differs), credit bank — so you do not double-count the expense you already accrued.

Worked example — rent

Annual rent Rs. 120,000 (Rs. 10,000 per month). Year end 31 December. Last payment was 30 September for the quarter July–September. Nothing paid for October–December by year end.

Three months unpaid → accrual = 3 × 10,000 = Rs. 30,000.
Dr Rent expense 30,000 / Cr Accruals 30,000.

SoPL rent for the year should reflect 12 months if the business occupied all year (adjust for whatever cash was already posted in the trial balance).

3. Prepaid expense (expense paid in advance)

You have paid cash now, but part of the benefit falls in a future period. Example: insurance paid on 1 April for 12 months; year end is 31 December.

Journal at year end (to move the future part out of expense):
Debit Prepayment (SFP — current asset)
Credit Expense (SoPL — reduce this year’s charge)

(If the bookkeeper posted the whole payment to expense, this year-end entry leaves only the used portion in SoPL.)

Worked example — insurance

Paid Rs. 24,000 on 1 April for 12 months to 31 March next year. Year end 31 December.

Months used this year (Apr–Dec) = 9 → expense = 9/12 × 24,000 = Rs. 18,000
Months still prepaid (Jan–Mar) = 3 → prepayment = 3/12 × 24,000 = Rs. 6,000

Trap

Count months carefully from the payment date to year end, and from year end to the end of cover. Do not use 6 and 6 out of habit when the policy started in April.

4. Accrued income (income earned, cash not yet received)

You have earned income this period, but the customer or counterparty has not paid yet (and it may not yet sit in receivables if it is something like interest or commission still to invoice).

Journal:
Debit Accrued income (SFP — current asset)
Credit Income (SoPL)

Example: deposit interest of Rs. 5,000 earned by year end but credited by the bank only next month. Dr Accrued income 5,000 / Cr Interest income 5,000.

5. Deferred income (cash received before it is earned)

Also called unearned income. Customer pays in advance for goods or services you will deliver next period.

Journal idea at year end:
If the full amount was credited to income already → Debit Income / Credit Deferred income (liability)
so that only the earned part stays in this year’s SoPL.

Example: Rs. 12,000 received on 1 December for 3 months’ service (Dec–Feb). Year end 31 December. Earned one month = 4,000. Unearned two months = 8,000 deferred income liability.

6. Opening balances brought forward (do not ignore last year)

The trial balance may already include cash payments and last year’s accruals/prepayments still on the SFP. Your job is to reach the correct expense for this year and the correct closing accrual or prepayment.

Expense for the year (logic):

Cash paid during the year (for this type of expense)	X
Add: closing accrual	X
Less: opening accrual	(X)
Less: closing prepayment	(X)
Add: opening prepayment	X
Expense in SoPL	X

You only use the lines that apply. This working stops double-counting opening accruals that were expenses last year.

Mini example

Opening electricity accrual Rs. 8,000
Paid during year Rs. 50,000
Closing electricity accrual Rs. 10,000

SoPL electricity = 50,000 + 10,000 − 8,000 = Rs. 52,000.

7. Where figures appear in the statements

Item	SoPL	SFP
Accrued expense	Expense ↑	Current liability
Prepaid expense	Expense ↓ (this year)	Current asset
Accrued income	Income ↑	Current asset
Deferred income	Income ↓ (this year)	Current liability

Prepayments and accrued income are usually current assets. Accruals and deferred income are usually current liabilities.

Exam traps checklist

Wrong month count (e.g. treating April–December as half a year)
Leaving last year’s accrual in expense again without removing it via the working
Recording a prepayment but still leaving the full cash amount as this year’s expense
Putting prepayments under non-current assets when cover is within 12 months
Confusing accrued expense (liability) with accrued income (asset)
Forgetting deferred income when cash was taken to sales too early

8. Quick memory sheet

Situation	SFP	Effect on this year’s P&L
Used it, not paid	Accrual (liability)	Extra expense
Paid, not fully used	Prepayment (asset)	Less expense
Earned, not received	Accrued income (asset)	Extra income
Received, not earned	Deferred income (liability)	Less income

Practice quiz

1. Insurance Rs. 24,000 paid 1 April for 12 months. Year end 31 December. Prepayment?

3/12 × 24,000 = Rs. 6,000 (Jan–Mar next year still prepaid). Expense this year = 18,000.

2. Rent Rs. 10,000 per month. At 31 Dec, three months unpaid. Journal?

Dr Rent expense 30,000 / Cr Accruals 30,000.

3. Opening accrual 8,000; paid 50,000; closing accrual 10,000. Expense for the year?

50,000 + 10,000 − 8,000 = Rs. 52,000.

4. Is a prepayment for the next three months of insurance a current asset or non-current?

Current asset — the benefit falls within the next 12 months.

5. Customer pays Rs. 12,000 on 1 Dec for 3 months’ service. Year end 31 Dec. Deferred income?

Two months still unearned → 8,000 deferred income liability. One month (4,000) earned in SoPL.

6. True or false? Accrued income is shown as a liability.

False. Accrued income is an asset (you are owed income you have earned). Accrued expense is a liability.

Important references

ACCA FA syllabus & study guide
Conceptual Framework — accruals basis of accounting
FA Study Hub
Double entry basics (if you need debit/credit refreshers)

Tutor habit: for every TB question, scan for “owing”, “in advance”, “received in advance”, and insurance/rent/electricity — then force yourself to write a one-line working before you journal.

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