AS-L12 — Accruals & Prepayments
Understanding how expenses and income are adjusted to match the correct accounting period.
Learning Objectives
By the end of this lesson students should be able to:
• understand the accruals principle
• distinguish between accruals and prepayments
• prepare accounting adjustments
• calculate adjusted expenses and income
• answer examination-style questions
Concept Framework
What is the Accruals Principle?
The accruals principle states that income and expenses should be recorded in the accounting period to which they relate, regardless of when cash is received or paid.
Key Terms
Accrued Expense → expense owing but not yet paid
Prepaid Expense → expense paid in advance
Accrued Income → income earned but not yet received
Prepaid Income → income received in advance
CORE RULES
| Adjustment | Effect on Expense/Income |
|---|---|
| Accrued Expense | Add |
| Prepaid Expense | Subtract |
| Accrued Income | Add |
| Income Received in Advance | Subtract |
TRANSACTION LOGIC
Accruals ensure that financial statements reflect the correct period.
Expenses relating to the current year must be included even if unpaid.
Amounts relating to future periods must be excluded from current expenses or income.
Worked Examples
Example 1 — Accrued Expense
Rent paid during year = £4,000
Rent owing at year end = £500
Income Statement Expense:
£4,000 + £500
= £4,500
Example 2 — Prepaid Expense
Insurance paid = £2,400
Insurance prepaid = £300
Income Statement Expense:
£2,400 − £300
= £2,100
Example 3 — Accrued Income
Commission received = £1,200
Commission owing = £150
Income Statement Income:
£1,200 + £150
= £1,350
📌 Additional questions are available in the 🎯 Lesson wise and module wise premium resources and Guess Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define accrual
Define prepayment
Level 2 – Application Practice
Explain why accruals and prepayments are necessary in financial accounting.
Level 3 – Examination Style Question
Electricity paid during the year = £3,600
Electricity owing at year end = £400
Calculate the electricity expense for the year.
(2 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you distinguish between accruals and prepayments?
2. Can you calculate adjusted expenses accurately?
3. Can you apply the accruals principle correctly?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Electricity Expense:
£3,600 + £400
= £4,000
How This Topic Appears in the Examination
This topic commonly appears as:
• adjustment calculations
• income statement adjustments
• statement of financial position entries
Examiners assess:
• application of the accruals principle
• correct calculations
• accurate classifications
Self-Assessment Checklist
I understand accruals
I understand prepayments
I can calculate adjusted expenses correctly
I can calculate adjusted income correctly
I can answer exam questions confidently
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