Skip to content

ACCA Applied Knowledge · Financial Accounting · Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income

A business pays $5,000 for next year's insurance before its year end and, at the year end, records the amount as a prepayment. Which journal entry correctly recognises the position at the year end for this amount?

Debit prepayments in the statement of financial position and credit insurance expense for $5,000. This removes the cost relating to the next period from profit or loss and recognises it as a current asset.

  1. ADebit Prepayments (SFP) $5,000; credit Insurance expense $5,000Correct
  2. BDebit Insurance expense $5,000; credit Prepayments (SFP) $5,000
  3. CDebit Prepayments (SFP) $5,000; credit Accruals $5,000
  4. DDebit Insurance expense $5,000; credit Cash $5,000

Explanation

The original payment debited insurance expense. At the year end, the amount relating to the next period is removed from expense (credit) and recognised as an asset (debit prepayments). Option B reverses the entry, and C wrongly creates a liability.

Did you get it right without looking?

One question tells you little. A timed set on Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income shows your real accuracy, how long you take and where you lose marks.

Practise Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred incomeFree diagnostic mock

More Accrued expenses (accruals), prepaid expenses (prepayments), accrued income and deferred income questions