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Accruals and prepayments
Published on August 31, 2017 15 min
Other Talks in the Series: Accounting Records and Accounts
Hello. This is Huw Morgan from the Alliance Manchester Business School. This the sixth talk in a series of lectures on accounting records.
In this lecture, we shall see how the matching concept applied in the previous session on depreciation is applied when accounting for prepayments and accrues. We then discuss the accounting treatment for trade payables and end the session with a review of other key underlying assumptions.
The accrues or matching basis ensures the transactions are recognized in the financial statements of the periods to which they relate. This matching concept will now be applied to payments in advance and in arrears beginning with a simple example from session two when Shawn was in his first month of trading and preparing monthly financial statements.
So this first example will involve a prepayment or a prepaid expense. This arises when a business pays out cash in advance of receiving the benefits. On the first of June, Shawn paid 4,000 for a license allowing access to festival sites for the next four months in advance. At that date, the prepayment meets the conditions of being an asset. There's a controlled right to future economic benefits from the use of the license for the next four months as a result of a past event, the payment in advance.
At the start of June, Shawn's business paid 4,000 for a license to trade at festivals over the summer. The initial entry on the credit side of the cashbook would have been posted as a decrease in cash.