IGCSE Accounting 0452 - 4.3 Other Payables and Receivables

This section covers the accounting treatment of accrued income and prepaid expenses. Understanding these concepts is crucial for presenting a true and fair view of a company's financial position and performance.

1. Accrued Income

Definition

Accrued income represents 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.

Example

A company provides consulting services in December but doesn't receive payment until January. The income earned in December is accrued.

Journal Entry

The journal entry to record accrued income is:

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

Ledger Account

The following shows how accrued income is recorded in a ledger account:

2. Prepaid Expenses

Definition

Prepaid expenses represent expenses that have been paid for in advance but haven't yet been incurred or used. This often happens when a company pays for insurance, rent, or subscriptions before the period they relate to.

Example

A company pays for its annual insurance premium in January. The expense is prepaid for the entire year.

Journal Entry

The journal entry to record prepaid expenses is:

• Debit: Prepaid Expense (an asset account)
• Credit: Cash (or Bank Account)

Adjusting Entry

At the end of the accounting period, an adjusting entry is made to recognize the portion of the prepaid expense that has been used up. This involves:

• Debit: Expense Account (e.g., Insurance Expense)
• Credit: Prepaid Expense (reducing the balance)

Ledger Account

The following shows how prepaid expenses are recorded in a ledger account:

3. Preparing Ledger Accounts

The ledger accounts for accrued income and prepaid expenses are essential for providing a detailed record of these transactions. They show the individual entries that have been made and the resulting balances.

Accrued Income Ledger Account (Example)

The ledger account would show the initial credit entry and the subsequent debit entry when the income is recognized.

Prepaid Expenses Ledger Account (Example)

The ledger account would show the initial debit entry and the subsequent credit entry at the end of the period to recognize the expense.

4. Journal Entries Summary

Here's a summary of the journal entries:

• Accrued Income: Debit Income Statement, Credit Accrued Income
• Prepaid Expense (Initial): Debit Prepaid Expense, Credit Cash
• Prepaid Expense (Adjusting): Debit Expense Account, Credit Prepaid Expense

5. Importance

Accurately recording accrued income and prepaid expenses is important for:

• Presenting a true and fair view of a company's financial performance and position.
• Ensuring that income and expenses are recognized in the correct accounting period (matching principle).
• Providing a clear understanding of the company's financial obligations and assets.