Accrued and Prepaid Incomes/Expenses — full notes
Paper No. 1: Financial Accounting · Accounting for Assets and Liabilities - Accruals/Prepayments
Accrued and Prepaid Incomes/Expenses
1. Four situations, one underlying question
Cash moving and the related expense or income being earned do not always happen in the same period.
| Expense | Income | |
|---|---|---|
| Incurred/earned but cash has not moved yet | Accrued expense (owed, not yet paid) | Accrued income (earned, not yet received) |
| Cash has moved, but relates to a future period | Prepaid expense (paid ahead) | Income received in advance (received ahead) |
An accrued expense and income received in advance are both liabilities. A prepaid expense and accrued income are both assets.
2. The adjustment - expenses
Expense for the year = Cash paid during the year
+ Closing accrual (owed at year end, for this year)
- Opening accrual (was owed at start of year, for last year)
+ Opening prepayment (paid last year, but for this year)
- Closing prepayment (paid this year, but for next year)
3. Worked example - accrued expense (rent)
Cash paid for rent: KES 240,000. Rent accrued at start of year: KES 15,000. Rent accrued at end of year: KES 20,000.
Rent expense = 240,000 + 20,000 - 15,000 = KES 245,000
4. Worked example - prepaid expense (insurance)
Cash paid for insurance: KES 180,000. Prepaid at start of year: KES 25,000. Prepaid at end of year: KES 30,000.
Insurance expense = 180,000 + 25,000 - 30,000 = KES 175,000
5. The income side - same logic, mirrored
Income for the year = Cash received during the year
+ Closing accrual (earned but not yet received)
- Opening accrual (was earned last year)
- Closing advance (received this year, for next year)
+ Opening advance (received last year, for this year)
This is precisely the subscriptions calculation from the Not-for-Profit pack, written here in its general form.
6. Where this has already appeared
- Partnership: interest on capital and salaries in the appropriation account
- Not-for-Profit: subscriptions in arrears and in advance - the exact formula in section 5
- Bank Reconciliation: bank charges "not yet recorded" are, in substance, an accrued expense discovered late