Accrued & Prepaid Income (Cambridge (CIE) IGCSE Accounting)

Revision Note

Transferring Income to the Income Statement

How do I record income in the income statement?

  • The accounting principle of matching states that income should be recorded for the financial period in which it is received

  • The value posted to the income statement for an income account should be the actual amount invoiced for that period

  • Entries are made in the income account:

    • During the financial period when payments are received

    • At the end of the financial period

Payments made during the financial period

At the end of the financial period

Account to debit

Cash or bank account

Income account

Account to credit

Income account

Income statement

Amount to record

The amount received

The amount due from customers for the financial period

How do I calculate the amount to transfer to the income statement for an income?

  • In an exam, you will likely be given information about an invoice for an income for a period that does not fully align with the financial period

    • For example, the financial period might be from March 2023 to February 2024 but an invoice for an income might be for August 2023 to July 2024

      • Only the amount for August 2023 to February 2024 should be posted to the income statement

  • STEP 1
    Find the amount due per month

    • Divide the total amount by the number of months in the invoice period

  • STEP 2
    Find the amount of the invoice due in that financial period

    • Multiply the amount per month by the number of months that are also in the financial period

  • There might be multiple invoices which cover the financial period

    • Find the amount of each which is due in the financial statement

    • Add these amounts together to get the total amount due

Examiner Tips and Tricks

It can help to write out the months involved and identify which ones belong in the financial period.

Worked Example

Tomas is a trader. Tomas receives payment for commission on 1 March each year for the following 12 months.

On 1 March 2023, he receives $3 000 commission and on 1 March 2024 he receives $3 300 commission.

How much should Tomas include for commission in his income statement for the year ended 30 April 2024?

Answer

The invoice periods are from March 2023 to February 2024, and from March 2024 to February 2025.

The financial period is from May 2023 to April 2024.

$3 000 is for the 12 months from March 2023 to February 2024.

Current financial period

M

A

M

J

J

A

S

O

N

D

J

F

M

A

M

J

J

A

S

O

N

D

J

F

$3 000 commission for the year

$3 300 commission for the year

Only May 2023 to February 2024 is included in the financial period.

  • STEP 1: Divide by 12 to find the monthly payment

    • $3 000 ÷ 12 = $250

  • STEP 2: Find the part of the total payment to be included in the income statement

    • 10 months (M-J-J-A-S-O-N-D-J-F)

    • $250 ✕ 10 = $2 500

$3 300 is for the 12 months from March 2024 to February 2025.

Only March 2024 to April 2024 is included in the financial period.

  • STEP 1: Divide by 12 to find the monthly payment

    • $3 300 ÷ 12 = $275

  • STEP 2: Find the part of the total payment to be included in the income statement

    • 2 months (M-A)

    • $275 ✕ 2 = $550

Add the two values together to find the amount for the income statement. 

$2 500 + $550 = $3 050

Accrued Income

What is an accrued income?

  • An accrued income is an income that is still owed to the business at the end of a financial period

    • This is also called an accrual

    • The income is in arrears

  • Accrued income can occur at the end of a financial period when a business receives less than the amount due in that period

    • This commonly happens when the invoice period of an income does not align with the financial period of the business

    • The business might receive payment at the end of the invoice period

      • However, this might be after the end of the current financial period

  • An accrued income is an asset to the business

    • The business is owed money by its customers

How do I record accrued income?

  • The income account will have a debit balance if there is an accrual at the end of the financial period

    • This indicates that it is an asset, as the business is still owed money from customers for that period

  • The full amount that is due for the period is stated on the income statement

  • The amount that is accrued appears on the statement of financial position as a current asset

    • It is included in the amount for other receivables

An income account with an accrual will have an opening balance on the debit side
Example of an income account with an accrual

Prepaid Income

What is a prepaid income?

  • A prepaid income is an income for the next financial period that is received in advance during the current end of a financial period

    • This is also called a prepayment

  • Prepaid income can occur at the end of a financial period when a business receives more than the amount due in that period

    • This commonly happens when the invoice period of an income does not align with the financial period of the business

    • The business might receive payment in full as soon as they issue an invoice

      • However, this invoice might also cover part of the next financial period

  • A prepaid income is a liability to the business

    • The business has received too much from the customer for that period

    • Technically, the business owes that money to the customer for that period 

How do I record prepaid income?

  • The income account will have a credit balance if there is a prepayment at the end of the financial period

    • This indicates that it is a liability

  • The full amount that is due for the period is stated on the income statement

  • The amount that is prepaid appears on the statement of financial position as a current liability

    • It is included in the amount for other payables

An income account with a prepayment will have an opening balance on the credit side
Example of an income account with a prepayment

Income Accounts with Accruals & Prepayments

How do I calculate the value to transfer to the income statement?

  • You could be asked to find the find value to transfer to the income statement

    • This is the amount that is due for that financial period

  • STEP 1
    Start with the amount that has been received during the current financial period

  • STEP 2
    Deal with any amounts carried over from the previous financial period

    • Subtract the amount if it is an accrual

      • Because this amount was not due in the current period

      • It was due in the previous period

    • Add the amount if it is a prepayment

      • Because this amount is due in the current period

  • STEP 3
    Deal with any amounts that will be carried over to the next financial period

    • Add the amount if it is an accrual

      • Because this amount is due in the current period

    • Subtract the amount if it is a prepayment

      • Because this amount is not due in the current period

      • It will be due in the next period

How do I calculate the amount received from an income within a financial period?

  • You could be asked to find the amount received within a financial period

    • This might be different to the amount that is due for that period

  • The method is the opposite of the previous method

  • STEP 1
    Start with the amount that is due for the current financial period

  • STEP 2
    Deal with any amounts carried over from the previous financial period

    • Add the amount if it is an accrual

      • Because this should have been received in the current period

    • Subtract the amount if it is a prepayment

      • Because this was not received in the current period

      • It was received in the previous period

  • STEP 3
    Deal with any amounts that will be carried over to the next financial period

    • Subtract the amount if it is an accrual

      • Because this has not been received during the current period

      • It will be received in the next period

    • Add the amount if it is a prepayment

      • Because this was also received during the current period

Examiner Tips and Tricks

ry to understand the logic behind the two methods above rather than memorising them.

  • If you need to find the amount to include on the income statement, then consider which amounts are due in the current financial period.

  • If you need to find the amount that has been received, then consider which amounts were received during the current financial period.

How do I calculate a missing value in an income account?

  • You can use a ledger account to find any missing value

    • Fill in the amounts that you know on the correct sides

    • Find the missing value which balances the account

  • You can use this method to find the amount received from an income as an alternative to the previous method

Layout of an income account showing the entries on each side for accruals and prepayments
Layout of an income account showing the entries on each side for accruals and prepayments

Worked Example

Hussain receives rent from Sayid.

On 1 January 2023, Sayid owed Hussain three months’ rent.

On 1 March 2023, Hussain receives a cheque from Sayid for $8 400 for 16 months’ rent.

Prepare the rent receivable account in the ledger for Hussain for the financial year ended 31 December 2023. Balance the account and bring down the balances on 1 January 2024. Clearly show the amount that is transferred to the income statement

Answer

Sayid paid for 16 months:

  • 12 months for the financial year

  • three months for the arrears at the start

  • one month prepaid for the next year

Find the accrual at the start of the year.

  • STEP 1: Divide the payment by 16 to get the monthly rent

    • $8 400 ÷ 16 = $525

  • STEP 2: Multiply the monthly rent by 3 to find the accrual at the start of the year

    • $525 ✕ 3 = $1 575

Find the amount due for the year ended 31 December.

  • Multiply the monthly rent by 12

    • $525 ✕ 12 = $6 300

Identify which side of the rent receivable account to post each transaction:

  • The payment from Sayid will be credited to the rent receivable account

    • Because it will be debited to the cash book

  • There is an accrual at the start of the year, which represents an asset

    • Therefore the opening balance will be on the debit side of the rent receivable account

  • The amount for the year is credited to the income statement

    • Therefore the rent receivable account will be debited

  • There is a prepayment at the end of the year, which represents a liability

    • Therefore there will be an opening balance on the credit side for the next year

    • Therefore, the closing balance will be on the debit side for this year

Hussain
Rent Receivable Account

Date

Details

$

Date

Details

$

2023

Jan 1

 

Balance b/d

1 575

2023

Jan 1

Bank

8 400

Dec 31

Income statement

6 300

Dec 31

Balance c/d

525

8 400

8 400

2024

Jan 1

Balance b/d

525

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Dan Finlay

Author: Dan Finlay

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Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.

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