Adjustments for Accrued & Prepaid Income (Cambridge (CIE) O Level Accounting)
Revision Note
Written by: Donna Simpson
Reviewed by: Dan Finlay
Adjustments for Accrued & Prepaid Income
How do I record accruals and prepayments of income on the financial statements?
Calculate the total amount that is due for the current year
See the revision note Accrued & Prepaid Income for more information
Accrued income is an amount which has not yet been received at the end of the accounting period
Prepaid income is an amount that is received in the current accounting period but relates to a future accounting period
The total amount due for the year is the value included on the income statement
If an income has an accrual then add that value to the balance of the account
If an income has a prepayment then subtract that value from the balance of the account
The amounts of the accruals or prepayments are stated on the statement of financial position
The amount of an income that is accrued is treated as a current asset
Label it as other receivables
The amount of an income that is prepaid is treated as a current liability
Label it as other payables
Examiner Tips and Tricks
To help remember whether an accrual or a prepayment of income is an asset or a liability, consider whether the business is still owed income. If it is then it is an asset.
Examiner Tips and Tricks
Where there are several accrued incomes, it is usual to show them all added as one figure on the statement of financial position called other receivables under current assets. Similarly, several prepaid incomes are added together as one figure called other payables under current liabilities.
Worked Example
Savio is a trader. His financial year ends 30 September 2023.
On 1 January 2023, Savio rents out a part of his building to a trader who pays $2 400 upfront for 12 months of rent.
Savio receives commission, $375, every three months. On 30 September 2023, Savio has not yet received commission for the previous three months.
Prepare extracts of the financial statements to show how the rent received and commission received are treated.
Answer
Rent:
Current financial period | ||||||||||||||
O | N | D | J | F | M | A | M | J | J | A | S | O | N | D |
$2 400 rent for the year | ||||||||||||||
Calculate the rent per month
£2 400 ÷ 12 = $200
Calculate the amount due for the financial year
9 months included (J-F-M-A-M-J-J-A-S)
9 ✕ $200 = $1 800
This is the amount that will be stated on the income statement even though more has been received
Identify the amount received in advance
3 months prepaid (O-N-D)
3 ✕ $200 = $600
This will be listed as a current liability on the statement of financial position
Commission
Calculate the commission per month
£375 ÷ 3 = $125
Calculate the amount due for the financial year
12 ✕ $125 = $1 500
This is the amount that will be stated on the income statement even though not all of it has been received
Identify the amount still owed
3 months owing: $375
This will be listed as a current asset on the statement of financial position
Savio Income Statement (extract) for the year ended 30 September 2023 | ||
Other income | $ | $ |
Rent | 1 800 | |
Commission | 1 500 | 3 300 |
Savio Statement of Financial Position (extract) at 30 September 2023 | |
$ | |
Current assets | |
Other receivables | 375 |
Current liabilities | |
Other payables | 600 |
Last updated:
You've read 0 of your 5 free revision notes this week
Sign up now. It’s free!
Did this page help you?
