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hi guys can someone explain the principles of accruals and prepayements? i dont get a single thing!!!

+1 Vote
September 15th 2014 AN ACCA USER 140 Points

3 Replies

+4 Votes

Hi, it's very simple indeed.

Prepayment is something that is paid or received in advance.

Imagine you get an invoice in December for the office rent. On the invoice is stated that rent period is January 2015. In this case when you get the invoice you have a prepayment because the cost is for the next accounting period (Jan 2015)

Dec 2014 (when you get the invoice)

DR Prepayment XX (SOFP)
CR Trade payables (SOFP)

Jan 2015:

CR Prepayment XX (SOFP)

The same situation when you bill a client in advance. Imagine that you are the landlord in the previous example. You cannot register the revenue in 2014 because the rent period is January 2015. In this case you need to take a prepayment (for the revenue point the name is Deferred Income)

Dec 2014 (when you raise the invoice)

DR Trade Receivables XX (SOFP)
CR Prepayment XX (SOFP)

Jan 2015:

DR Prepayment XX (SOFP)
CR Revenues XX (SOPLOCI)

The principle of the accrual is the opposite of prepayment.

Imagine that your landlord bill you in Jan 2015 for the rent of Dec 2014. When you get the invoice in Jan 2015 you cannot recognise the cost in Jan because is for the previous accounting period.

In this case in December you need to take an accrual

Dec 2014

CR Accrual XX (SOFP)

Jan 2015 (when you get the invoice)

DR Accrual XX (SOFP)
CR Trade payables XX (SOFP)

If you are the landlord:

Dec 2014

DR Accrual XX (SOFP)
CR Revenue XX (SOPL)

Jan 2015 (when you raise the invoice)

DR Trade receivables XX (SOFP)
CR Accrual XX (SOFP)

I hope this can help you and sorry for my poor English.

November 17th 2014 AN ACCA USER 950 Points
Edited March 1st 2015 AN ACCA USER
+1 Vote

Check these two links:
Cash vs Accrual
Trial Balance
Hope it will be helpful

September 18th 2014 AN ACCA USER 8,730 Points
0 Votes
yep it is helpful thanks
April 22nd 2015 AN ACCA USER 1,290 Points