I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 

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   Accruals and prepayments 

Accrued expenses (accruals) are expenses which relate to an accounting period but have not been paid 

for. They are shown in the statement of financial position as a liability. 

Prepaid expenses (prepayments) are expenses which have already been paid but relate to a future 

accounting period. They are shown in the statement of financial position as an asset.  

1.1 Introduction 

We have already seen that the gross profit for a period should be calculated by matching sales and the 

cost of goods sold. In the same way, the profit for the year for a period should be calculated by charging 

the expenses which relate to that period. For example, in preparing the statement of profit or loss of a 

business for a period of, say, six months, it would be appropriate to charge six months' expenses for rent 

and local taxes, insurance costs and telephone costs, etc. 

Expenses might not be paid for during the period to which they relate. For example, a business rents a 

shop for $20,000 per annum and pays the full annual rent on 1 April each year. If we calculate the 

profit of the business for the first six months of the year 20X7, the correct charge for rent in the 

statement of profit or loss is $10,000, even though the rent paid is $20,000 in that period. Similarly, 

the rent charge in the statement of profit or loss for the second six months of the year is $10,000, even 

though no rent was actually paid in that period. 

Accruals

 or accrued expenses are expenses which are charged against the profit for a particular period, 

even though they have not yet been paid for. They are shown in the statement of financial position as a