ADJUSTING for ACCRUALS and PREPAYMENTS

This is from a youtube website that was in chinese, so I decided to type it out as it is very helpful. If you speak chinese the link is: LCCI Level 1 - Ch 16 Adjusting for Accruals and Prepayments and Ch23 Year end Adjustments 1 - YouTube 

I hope this helps **

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  • Created on: 06-02-12 19:16
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ADJUSTING FOR ACCRUALS AND PREPAYMENTS & YEAR REND ADJUSTMENTS
CASH ACCOUNTING vs. ACCRUAL ACCOUNTING
Net profit measured under these two methods of accounting would be very different
One of the main differences between cash accounting lies in the treatment of accruals and
prepayments of expenses and revenues
ACCRUALS
Accruals refer to the expenses that have been incurred during a period but have not been paid by the
end of the period
Such an item can be called accrued expense, unpaid expense, expense payable or expense
owing
Accruals can also refer to the revenues that have been earned during a period but have not been
received by the end of that period.
Such an item can be called accrued revenue, unpaid revenue, revenue receivable or revenue in
arrears.
ACCRUED EXPENSES
Example:
Suppose Firm A stared business on 1 January 2009 and paid water charges in cash on the following dates
Consumption period Water Payment due
charges
1 January ­ 30 April 2009 $480 20 May 2009
1 May ­ 31 August 2009 $960 18 September 2009
1 September ­ 31 December $1,240 19 January 2010
Note that the last billing of $1,240 was incurred in 2009 but the amount was not paid until 19 January
2010
The double entry for the payment of an expense is
Dr: Expense account (in the general ledger) Cr: Cash book (or bank/ cash acc in the general ledger)

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The water charges paid on 19 January 2010 would be entered in the account in 2010.
USING CASH ACCOUNTING
The water charges account would be closed off at the end of 2009 as follows:
And the water expenses shown in the income statement for the year ended 31 December 2009 would
be $1,440, which the total amount was paid during the year.…read more

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