Accrued & Prepaid Income (Cambridge (CIE) O Level Accounting)

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

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

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

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

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

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