IGCSE Accounting 0452 - 4.3 Other Payables and Receivables

Objective

To prepare ledger accounts and journal entries to record accrued and prepaid incomes.

Understanding Accrued and Prepaid Incomes

Accrued Income: Income that has been earned but not yet received in cash. This typically occurs when services have been provided or goods have been delivered, but the customer hasn't paid the invoice yet.

Prepaid Income: Income that has been received in cash for services or goods that have not yet been provided. This happens when a customer pays in advance for future services or deliveries.

Journal Entries for Accrued Income

When income is accrued, a journal entry is made to recognise the income earned and to create a corresponding payable (accrued liability).

The format of the journal entry is:

Debit: Income Statement (or Revenue Account)
Credit: Accrued Income (a liability account)

The amount debited is the amount of income earned.

Journal Entries for Prepaid Income

When income is prepaid, a journal entry is made to recognise the cash received and to create a prepaid income (asset account).

The format of the journal entry is:

Debit: Cash (or Bank)
Credit: Prepaid Income (an asset account)

The amount credited is the amount of cash received.

Ledger Accounts

The journal entries are then posted to the relevant ledger accounts.

Accrued Income Ledger: This account shows the balances of all accrued income.

Prepaid Income Ledger: This account shows the balances of all prepaid income.

Example 1: Accrued Income

On December 31st, 2023, a company earned £500 worth of consulting fees but had not yet received payment. The journal entry to record this is:

Date	Account	Debit (£)	Credit (£)
Dec 31, 2023	Consulting Fees	500
	Accrued Income		500

The Accrued Income ledger account would be credited with £500.

Example 2: Prepaid Income

On January 15th, 2024, a company received £1200 from a customer for a year's supply of goods. The journal entry to record this is:

Date	Account	Debit (£)	Credit (£)
Jan 15, 2024	Cash	1200
	Prepaid Income		1200

The Prepaid Income ledger account would be debited with £1200.

Example 3: Accrued Income - Posting to Ledger

The following journal entry was made on December 31st, 2023:

Date	Account	Debit (£)	Credit (£)
Dec 31, 2023	Consulting Fees	500
	Accrued Income		500

The posting to the Accrued Income ledger account would be:

Date	Description	Folio	Debit (£)	Credit (£)	Balance (£)
Dec 31, 2023	Initial Balance				0
Dec 31, 2023	Consulting Fees (Accrued)		500		500

Example 4: Prepaid Income - Posting to Ledger

The following journal entry was made on January 15th, 2024:

Date	Account	Debit (£)	Credit (£)
Jan 15, 2024	Cash	1200
	Prepaid Income		1200

The posting to the Prepaid Income ledger account would be:

Date	Description	Folio	Debit (£)	Credit (£)	Balance (£)
Jan 15, 2024	Initial Balance				0
Jan 15, 2024	Cash (Prepaid)		1200		1200

Important Considerations

• Accrued income is recognised in the period it is earned, regardless of when the cash is received.
• Prepaid income is recognised over the period for which the goods or services are provided.
• The classification of income as accrued or prepaid depends on the timing of the cash flow relative to the earning or provision of the income.