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

Consider Example 2: 

ELECTRICITY ACCOUNT 

20X2 

 

$ 

20X2 

 

$ 

30.4 

 

Cash 

   5,279.47

31.12 

Statement of profit  

   or loss 

 

18,388.23 

31.7 

 

Cash 

   4,663.80

 

 

 

31.10 

 

Cash 

   4,117.28

 

 

 

31.12 

 

Balance c/d (accrual) 

   4,327.68

 

 

                 

 

 

 18,388.23

 

 

 

18,388.23 

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PART D: RECORDING TRANSACTIONS AND EVENTS 

 

186

 

20X3 

 

$ 

20X3 

 

$ 

31.1 

 

Cash 

   6,491.52

1.1 

Balance b/d 

 

30.4 

 

Cash 

   5,400.93

 

   (accrual reversed) 

   

4,327.68 

31.7 

 

Cash 

   4,700.94

31.12

 

Statement of profit     

   or loss

 

 

21,387.87

 

31.10 

 

Cash 

   4,620.00

 

 

 

31.12 

 

Balance c/d (accrual) 

   4,502.16

 

 

                 

 

 

 25,715.55

 

 

 

25,715.55 

The statement of profit or loss charge and accrual for 20X3 can be checked as follows. 

Invoice paid 

$ 

Proportion charged in 20X3 

$ 

31.1.X3 

 

6,491.52 

1/3 

 

2,163.84 

30.4.X3 

 

5,400.93 

all 

 

5,400.93 

31.7.X3 

 

4,700.94 

all 

 

4,700.94 

31.10.X3 

 

4,620.00 

all 

 

4,620.00 

31.1.X4 

 

6,753.24 

2/3 

 

  4,502.16 

Charge to statement of profit or loss in 20X3 

 

 

21,387.87 

QUESTION 

Accruals

 

Ratsnuffer is a business dealing in pest control. Its owner, Roy Dent, employs a team of eight who were 

paid $12,000 per annum each in the year to 31 December 20X5. At the start of 20X6 he raised 

salaries by 10% to $13,200 per annum each.  

On 1 July 20X6, he hired a trainee at a salary of $8,400 per annum. 

He pays his workforce on the first working day of every month, one month in arrears, so that his 

employees receive their salary for January on the first working day in February, etc. 

Required 

(a) 

Calculate the cost of salaries which would be charged in the statement of profit or loss of 

Ratsnuffer for the year ended 31 December 20X6. 

(b) 

Calculate the amount actually paid in salaries during the year (ie the amount of cash received by 

the workforce).  

(c) 

State the amount of accrued charges for salaries which would appear in the statement of 

financial position of Ratsnuffer as at 31 December 20X6. 

ANSWER 

(a) 

Salaries cost in the statement of profit or loss 

 

$      

Cost of 8 employees for a full year at $13,200 each 

 105,600 

Cost of trainee for a half year 

     4,200 

 

 109,800 

(b) 

Salaries actually paid in 20X6 

 

$      

December 20X5 salaries paid in January (8 employees  $1,000 per month) 

8,000 

Salaries of 8 employees for January – November 20X6 paid in February –     

   December (8 employees  $1,100 per month  11 months) 

 

96,800 

Salaries of trainee (for July – November paid in August – December  

   20X6: 5 months  $700 per month) 

     3,500 

Salaries actually paid 

 108,300 

(c) 

Accrued salaries costs as at 31 December 20X6  

 

(ie costs charged in the statement of profit or loss, but not yet paid) 

 

 $     

8 employees  1 month  $1,100 per month 

 8,800 

1 trainee  1 month  $700 per month 

    700 

 

 9,500 

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CHAPTER 10  

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  ACCRUALS AND PREPAYMENTS 

 

187 

(d) 

Summary 

 

$      

Accrued wages costs as at 31 December 20X5 

 8,000 

Add salaries cost for 20X6 (statement of profit or loss) 

 109,800 

 

 117,800 

Less salaries paid 

 108,300 

Equals accrued wages costs as at 31 December 20X6 (liability) 

     9,500 

 

 

1.6 Example 4: prepayments 

The Square Wheels Garage pays fire insurance annually in advance on 1 June each year. The firm's 

financial year end is 28 February. From the following record of insurance payments you are required to 

calculate the charge to statement of profit or loss for the financial year to 28 February 20X8. 

Insurance paid 

 

$ 

1.6.20X6 

600 

1.6.20X7 

700 

Insurance cost for: 

 

 

$   

(a) 

Three months, 1 March – 31 May 20X7 (3/12  $600) 

150 

(b) 

Nine months, 1 June 20X7 – 28 February 20X8 (9/12  $700) 

 525 

Insurance cost for the year, charged to the statement of profit or loss 

 675 

At 28 February 20X8 there is a prepayment for fire insurance, covering the period 1 March – 31 May 

20X8. This insurance premium was paid on 1 June 20X7, but only nine months' worth of the full annual 

cost is chargeable to the accounting period ended 28 February 20X8. The prepayment of (3/12 × 

$700) $175 as at 28 February 20X8 will appear as a current asset in the statement of financial 

position of the Square Wheels Garage as at that date. 

In the same way, there was a prepayment of (3/12 × $600) $150 in the statement of financial position 

one year earlier as at 28 February 20X7. 

Summary 

 

$ 

Prepaid insurance premiums as at 28 February 20X7 

 150 

Add insurance premiums paid 1 June 20X7 

 700 

 

 850 

Less insurance costs charged to the statement of profit or loss for the  

       year ended 28 February 20X8 

 675 

Equals prepaid insurance premiums as at 28 February 20X8 (asset) 

 175 

QUESTION 

Accruals and prepayments

 

The Batley Print Shop rents a photocopying machine from a supplier for which it makes a quarterly 

payment as follows. 

(a) 

Three months' rental in advance 

(b) 

A further charge of 2 cents per copy made during the quarter just ended 

The rental agreement began on 1 August 20X4 and the first six quarterly bills were as follows. 

Bills dated and received 

Rental 

Costs of copies taken 

Total 

 $ 

$ 

$ 

1 August 20X4 

2,100 

0 

2,100 

1 November 20X4 

2,100 

1,500 

3,600 

1 February 20X5 

2,100 

1,400 

3,500 

1 May 20X5 

2,100 

1,800 

3,900 

1 August 20X5 

2,700 

1,650 

4,350 

1 November 20X5 

2,700 

1,950 

4,650 

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