Accruals and prepayments without guesswork
The key is to separate when cash moves from when the expense or income is earned.
- ✓A prepayment is a payment for a future accounting period
- ✓An accrual records an expense incurred but not yet paid
- ✓Adjust profit and the statement of financial position together
Worked question
A business pays €12,000 rent on 1 October for the next 12 months. Its year ends on 31 December. What rent expense is recognised?
- A. €3,000
- B. €9,000
- C. €12,000
- D. €15,000
Answer: €3,000
Only October, November, and December belong to the current year. Three months at €1,000 gives a €3,000 expense. The remaining €9,000 is a prepayment.
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