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Accruals and prepayments

Accrued and prepaid income

2.1 Accrued income

Accrued income arises when the income has been earned in the accounting period,
but that cash has not yet been received.

In this case, it is necessary to record this income in the statement of profit or loss and
create a corresponding asset (accrued income) in the statement of financial position,
as follows:

Debit Accrued income account (SOFP)

Credit Income account (SOPL)

Accrued income therefore increases profit.

2.2 Prepaid income

Prepaid income arises when income has been received during the current accounting
period which relates to the next accounting period.

In this case, it is necessary to remove the excess income from the statement of profit
or loss for the current year and create a corresponding liability (prepaid income) in
the statement of financial position, as follows:

Debit Income account (SOPL)

Credit Prepaid income (SOFP)

Prepaid income therefore reduces profit

Tutor notes guidance – discussion points

Take students through Illustrations 3 and 4 from Chapter 10 of the Study Text.

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