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Chapter-6

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									Chapter 6 Adjustment to accounts 1:
accruals and prepayments
Learning summary
By the end of this chapter you should know:
• what an accrual is
• accounting treatment for accruals
• what a prepayment is
• accounting treatment for a prepayment.




               Unlocking Financial Accounting
                         Chapter 6
What is an accrual? – key points

• For accounting purposes an accrual is ‘a liability in
  respect of goods and services provided to a business
  in the form of continuous supply, consumed up to an
  accounting date but not billed by that date’ (R.
  Brockington (1993)).

• It is simply an amount that relates to a particular
  period but as yet has not been settled.




                Unlocking Financial Accounting
                          Chapter 6
Accounting treatment for accruals – key
points
An accrual adjustment requires:

• an increase in the expenses on the income statement
• an increase in or a creation of an accrual on the
  balance sheet, under the current liabilities section.




               Unlocking Financial Accounting
                         Chapter 6
What is a prepayment? – key points

• For accounting purposes prepayments are ‘amounts
  already paid which will fall to be treated as expenses
  in a forthcoming period’. (R. Brockington (1993)).

• It is simply an amount that relates to a future period
  and therefore needs to be shown in that future period




               Unlocking Financial Accounting
                         Chapter 6
Accounting treatment for a prepayment
– key points

A prepayment adjustment requires:

• a decrease in the expenses on the income statement
• an increase in or a creation of a prepayment on the
  balance sheet, under the current assets section.




              Unlocking Financial Accounting
                        Chapter 6

								
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