IGCSE Accounting Ch 12: Other Payables & Receivables

Cambridge IGCSE Accounting

Other Payables and Other Receivables

This chapter explains how year-end adjustments make sure the financial statements include only the expenses and income that belong to the correct financial year. It covers accrued expenses, prepaid expenses, accrued income, prepaid income, other payables, other receivables, profit effects and statement of financial position effects.

Matching principleAccrued expensesPrepaid expensesAccrued incomePrepaid incomeProfit effectsStatement of financial positionExam rules

Four year-end adjustments for other payables and other receivables

Topic 1: Matching Costs and Revenues

The aim is to match income and expenses to the correct accounting year before profit is calculated.

1. Matching Costs and Revenues

Financial statements should include only the expenses and income that belong to that financial year. This follows the matching principle.

Sometimes:

expenses are owed but not yet paid
expenses are paid in advance
income is earned but not yet received
income is received in advance

These require year-end adjustments so that the correct profit is calculated.

2. The Four Important Adjustments

Adjustment	Meaning	Statement of Financial Position
Accrued expense	Expense owing	Current liability
Prepaid expense	Expense paid in advance	Current asset
Accrued income	Income owing to the business	Current asset
Prepaid income	Income received in advance	Current liability

Owe an expense → LiabilityPaid expense early → AssetIncome owed to us → AssetIncome received early → Liability

Topic 2: Expense Adjustments

Expense adjustments decide how much expense belongs to the current year and whether an asset or liability appears in the statement of financial position.

3. Accrued Expense

An accrued expense is an expense that belongs to the current financial year but has not yet been paid.

Example
Rent paid during the year = $10,000
Rent still owing = $2,000

Rent expense for the year$10,000 + $2,000$12,000

Income statement: Rent expense = $12,000
Statement of financial position: Other payables – Rent accrued = $2,000

Effect

Accrued expense:

increases expenses
decreases profit
increases current liabilities

4. Accrued Expense – Double Entry

At the year end:

Debit	Credit
Dr Expense account	Cr Accrued expense / Other payables

Example
Electricity accrued = $500

Account	Debit $	Credit $
Electricity	500
Other Payables		500

The accrual is carried forward as a credit balance.

5. Opening Accrual

An accrual at the end of one year becomes an opening accrual in the next year.

Example
Electricity owing at beginning = $100
Paid during year = $1,000
Electricity owing at end = $150
Expense for the year:
Opening accrual + Payments?
A safer formula is:

Expense = Amount paid + Closing accrual − Opening accrual

Expense$1,000 + $150 − $100$1,050

This is the amount charged to the income statement.

6. Prepaid Expense

A prepaid expense is an expense that has already been paid but relates to the next financial year.

It must therefore be deducted from the current year's expense.

Example
Rent paid = $6,000
Rent prepaid = $500

Rent expense for this year$6,000 − $500$5,500

Income statement: Rent = $5,500
Statement of financial position: Other receivables – Rent prepaid = $500

Effect

Prepaid expense:

decreases expenses
increases profit
increases current assets

7. Prepaid Expense – Double Entry

At the year end:

Debit	Credit
Dr Prepaid expense / Other receivables	Cr Expense account

Example
Insurance prepaid = $300

Account	Debit $	Credit $
Other Receivables	300
Insurance		300

The prepayment is carried forward as a debit balance.

8. Expense Formula

Expense for the year = Amount paid + Closing accrual − Opening accrual − Closing prepayment + Opening prepayment

You do not always need the whole formula. Use only the information given.

Example
Insurance paid = $4,000
Opening prepayment = $300
Closing prepayment = $500

Expense$4,000 + $300 − $500$3,800

Topic 3: Income Adjustments

Income adjustments decide how much income belongs to the current year and whether an asset or liability should be recorded.

9. Accrued Income

Accrued income is income that has been earned during the year but has not yet been received.

Example
Rent received = $5,000
Rent still owing = $600

Income for the year$5,000 + $600$5,600

Income statement: Rent receivable = $5,600
Statement of financial position: Other receivables – Rent accrued = $600

Effect

Accrued income:

increases income
increases profit
increases current assets

10. Accrued Income – Double Entry

At the year end:

Debit	Credit
Dr Accrued income / Other receivables	Cr Income account

Example
Commission owing = $200

Account	Debit $	Credit $
Other Receivables	200
Commission Receivable		200

11. Prepaid Income

Prepaid income is income received during the current year for goods or services that will be provided in the next financial year.

It must be deducted from the current year's income.

Example
Commission received = $3,000
Of this, $400 relates to next year.

Income for this year$3,000 − $400$2,600

Income statement: Commission = $2,600
Statement of financial position: Other payables – Commission prepaid = $400

Effect

Prepaid income:

decreases income
decreases profit
increases current liabilities

12. Prepaid Income – Double Entry

At the year end:

Debit	Credit
Dr Income account	Cr Prepaid income / Other payables

Example
Rent received in advance = $500

Account	Debit $	Credit $
Rent Receivable	500
Other Payables		500

Topic 4: Effects on Profit and Financial Position

Accruals and prepayments change both profit and the statement of financial position.

13. Quick Effect on Profit

Adjustment	Effect on Profit
Accrued expense	Profit decreases
Prepaid expense	Profit increases
Accrued income	Profit increases
Prepaid income	Profit decreases

This is very important for exam questions.

14. Quick Effect on Statement of Financial Position

Adjustment	Classification
Accrued expense	Current liability – Other payables
Prepaid expense	Current asset – Other receivables
Accrued income	Current asset – Other receivables
Prepaid income	Current liability – Other payables

Effects of accruals and prepayments on profit and financial position

15. Example with Several Adjustments

Trial balance shows:

Rent = $750
Electricity = $50
Rates = $140

At year end:

Rent prepaid = $60
Electricity accrued = $45
Rates accrued = $30

Income Statement

Rent$750 − $60$690

Electricity$50 + $45$95

Rates$140 + $30$170

Statement of Financial Position

Current asset:
Rent prepaid = $60

Current liabilities:
Electricity $45 + Rates $30 = $75

The textbook uses this type of combined adjustment to show how several other receivables and payables are presented.

Topic 5: Stationery, Definitions and Exam Rules

Unused items and final rules help you quickly decide whether to add, subtract, show an asset or show a liability.

16. Stationery Account

Unused stationery at the end of the year is treated similarly to a prepaid expense because its benefit will be received in the next year.

Example
Stationery purchased = $600
Unused stationery at year end = $100

Stationery used$600 − $100$500

Income statement: Stationery expense = $500
Statement of financial position: Unused stationery = Current asset $100

17. Most Important Exam Rules

Expenses
Accrued expense → ADD
Prepaid expense → SUBTRACT

Income
Accrued income → ADD
Prepaid income → SUBTRACT

So:
Accrued = belongs to this year but not yet paid/received
Prepaid = already paid/received but belongs to next year

Most important exam rules for accrued and prepaid expenses and income

Key Terms

Accrued expenseExpense owing at the year end.

Prepaid expenseExpense paid in advance.

Accrued incomeIncome earned but not yet received.

Prepaid incomeIncome received before it has been earned.

Other payablesAmounts owed by the business apart from normal trade payables.

Other receivablesAmounts owed to the business apart from normal trade receivables.

Year-end adjustmentAdjustment made so that the financial statements show the correct income, expenses and profit.

Remember

Expense

Accrued → Add
Prepaid → Subtract

Income

Accrued → Add
Prepaid → Subtract

Statement of Financial Position

Accrued expense → Liability
Prepaid expense → Asset
Accrued income → Asset
Prepaid income → Liability