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level: Accruals and prepayments

Questions and Answers List

level questions: Accruals and prepayments

Question	Answer
What is another term used for the accruals concept?	The matching concept
What is the basic principle in the accruals concept?	Items are recognised in the period in which they are earned.
What are accrued expenses?	Expenses that are charged agains the profit of a period even though they have not been paid for yet in that period.
What are prepaid expenses?	Expenses which have already been paid for, but relate to a future period.
What must be done with accruals and prepayments brought forward in the new period?	They must be reversed. Ie they must be moved out of the one account (eg prepayments) and into the new account (eg expenses). eg Cr. Prepayments Dr. Expenses
How should deferred income be shown in the financial statements?	As a Payable in the Statement of Financial Position.
What is Deferred Income?	Income that has been received before it is earned.
What effect do accruals have on profit?	Reduces net profit
What effect do prepayments have on profit?	Increase net profit
What effect do prepayments of income have on profit?	Reduce net profit
What effect does income accrued have on profit?	Increase net profit
What effect do accruals have on income and expenses?	Increase expenses
What effect do prepayments have on income and expenses?	Decrease expenses
What effect do prepayments of income have on income and expenses?	Reduce income
What effect does income accrued have on income and expenses?	Increase income
What effect do accruals have on assets/liabilities?	Increase liabilities
What effect do prepayments have on assets/liabilities?	Increase Assets
What effect do prepayments of income have on assets/liabilities?	Increase liabilities
What effect does income accrued have on assets/liabilities?	Increase assets
On which statement is accrued income recorded?	On the SFP as an asset.
How is prepaid income recorded in the financial statements?	On the SFP as a liability.
What is deferred income?	When income has been received in advance of it being earned.
What is accrued income?	When income has been earned but not yet received.