Accruals and prepayments: practice questions

How to approach these questions

Expenses and income belong to the period in which they are used or earned, not the period in which cash moves. Before you calculate, read the requirement.

You may need the figure for the income statement charge, the accrual or prepayment for the statement of financial position, or both. They are different outputs from the same information, so state which one you are producing. Find the amount actually paid or received during the year, then adjust it to the amount that relates to this year.

An expense should reflect the cost used in the period. If part of this year's expense is unpaid, that part is an accrual, a current liability. Add it to the cash paid.

If part of what was paid relates to next year, that part is a prepayment, a current asset. Deduct it from the cash paid. Income works the opposite way round.

Income earned but not yet received is accrued income, an asset, added to cash received. Income received in advance is a liability, deducted from cash received.

The skill is deciding whether an item is owed or paid ahead. Reason it through slowly.

Use a short calculation or a T-account. Suppose rent paid during the year is RM24,000. At the start of the year there was a prepayment of RM2,000 that relates to this year.

At the end there is an accrual of RM3,000 still owed for this year. The charge to the income statement is 24,000 + 2,000 + 3,000 = RM29,000.

The closing accrual of RM3,000 appears as a current liability. Write each step separately to protect the method marks.

Work in a consistent order: the cash figure, then the opening balance, then the closing balance, then the income statement charge and the statement of financial position item. Opening balances trip students up, because their effect is the reverse of closing balances. An opening prepayment is added, because that prepaid amount is used this year.

An opening accrual is deducted, because it was last year's cost, now being settled. A T-account avoids memorising. An opening prepayment is a debit balance brought down.

An opening accrual is a credit balance brought down. Balancing the account gives the income statement figure.

The most common trap is adjusting in the wrong direction. A quick sense check fixes it. A prepayment means you paid too much, so the true expense is lower than the cash paid.

An accrual means you paid too little, so the true expense is higher. Another trap is forgetting to carry the closing balance into the statement of financial position after using it in the income statement. The same figure serves both.

A third trap is mixing up expense adjustments and income adjustments. Confirm whether the item is money paid out or received before choosing the direction.

Finally, check both outputs agree. The closing accrual added to the expense must equal the current liability you list.

The closing prepayment you deducted must equal the current asset you list. Label each answer.

If you keep adjusting in the wrong direction, we can help. One of our teachers can work through a set of questions with you and give you a quick check that fits how you think. Book a trial class