4.3 Other payables and other receivables (3)
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1.
Question 1
On 1 January 2023, ABC Ltd received £12,000 in advance for services to be provided between January 1st and March 31st 2023. Prepare the necessary ledger accounts and journal entries to record the prepaid income and its subsequent recognition as revenue.
Journal Entry (1 January 2023):
| Date | Account Debited | Account Credited | Amount |
| 1 Jan 2023 | Prepaid Income | Cash | £12,000 |
Ledger Account - Prepaid Income:
| Date | Particulars | Debit | Credit |
| 1 Jan 2023 | Balance b/f | £12,000 | |
| 31 Mar 2023 | Revenue Account | £12,000 | |
Journal Entry (31 March 2023):
| Date | Account Debited | Account Credited | Amount |
| 31 Mar 2023 | Revenue Account | Prepaid Income | £12,000 |
2.
Question 3
On 1 June 2023, a company received £2,500 from a customer for services to be provided between June 1st and August 31st 2023. Prepare the necessary ledger accounts and journal entries to record the prepaid income and its subsequent recognition as revenue. The company uses the accrual basis of accounting.
Journal Entry (1 June 2023):
| Date | Account Debited | Account Credited | Amount |
| 1 Jun 2023 | Prepaid Income | Cash | £2,500 |
Ledger Account - Prepaid Income:
| Date | Particulars | Debit | Credit |
| 1 Jun 2023 | Balance b/f | £2,500 | |
| 31 Aug 2023 | Revenue Account | £2,500 | |
Journal Entry (31 August 2023):
| Date | Account Debited | Account Credited | Amount |
| 31 Aug 2023 | Revenue Account | Prepaid Income | £2,500 |
3.
Consider a business that provides a service. The business incurs salaries for its employees in December, but the service is provided to customers in January. Describe how the matching principle applies to this situation and explain the benefit of applying it.
The matching principle dictates that the salaries incurred in December should be matched with the revenue earned in January. This means the business should recognize the salaries expense in January, even though the salaries were paid in December.
Benefit of Applying the Matching Principle:
- Accurate Reflection of Profitability: By matching the salaries expense with the January revenue, the income statement accurately reflects the profit generated during January. It avoids a situation where the profit is artificially inflated by delaying the recognition of the salaries expense.
- Improved Performance Evaluation: Managers can more accurately evaluate the performance of the business by comparing the January revenue and expenses. This allows for better decision-making regarding pricing, staffing, and other operational aspects.
- Fair Comparison with Other Businesses: Applying the matching principle ensures that the business's financial statements are comparable to those of other businesses that also provide services. This is because all businesses should recognize expenses in the same period as the revenues they generate.
Without the matching principle, the business's profit would be misrepresented, potentially leading to poor business decisions.