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Accounting for accruals and prepayments

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 crease 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.

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