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Accruals and prepayments

Accrued and prepaid expenses

1.1 Accrued expenditure

An accrual arises where expenses of the business entity for the current period have
been incurred but not yet paid at the end of the year. This could be the case, for
example, with telephone bills when you incur the expense and then wait for the bill to
arrive to advise you of the exact charge.

In this case, it is necessary to record the extra expense relevant to the year and
create a corresponding statement of financial position liability (called an accrual) as
follows:

Debit Expense account (SOPL)

Credit Accrual account (SOFP)

An accrual therefore reduces profit

Illustrations and further practice

Now try question TYU 1 from Chapter 10 of the Study Text.

Tutor notes guidance – discussion points

Discuss the accruals concept here and the impact on profit. Take students
through illustration 1 from Chapter 10 of the Study Text.

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