How do we match income and expenses to the right period when cash is paid early or late?
The accruals concept applied to expenses and income, the calculation and recording of accrued and prepaid expenses and income, and their treatment in the income statement and statement of financial position.
A focused answer to AQA A-Level Accounting 3.1, covering the accruals concept, the calculation and recording of accrued and prepaid expenses and income, and how each is shown in the income statement and statement of financial position.
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What this dot point is asking
AQA wants you to apply the accruals concept to adjust expenses and income, calculate accrued and prepaid amounts, and show each correctly in the income statement and statement of financial position. This is unit 3.1.7, and the adjustments are almost always embedded in the larger financial-statement preparation question, so getting them right protects the whole profit figure.
The accruals concept
Accrued and prepaid expenses
The cleanest way to handle these in an exam is through the expense account, working from cash paid to the income statement charge. Start with cash paid during the year. Add a closing accrual (cost incurred but not yet paid) and deduct a closing prepayment (cost paid but not yet incurred). Opening balances reverse: an opening prepayment is added back (it is this year's cost, paid last year) and an opening accrual is deducted (it was last year's cost, paid this year). The resulting figure is the cost of the resource used this year, which is what the income statement should show.
A worked adjustment
Income adjustments
The same logic applies in reverse to income. Accrued income (earned but not yet received, such as commission or rent due to the business) is added to the income recognised and shown as a current asset. Income received in advance (such as rent collected for next year, or a deposit) is deducted from the income recognised and shown as a current liability, because the business still owes the service or the refund. The realisation concept underpins this: income is recognised when earned, not when the cash arrives.
Try this
Q1. Insurance of was paid, but relates to next year. State the income statement charge. [2 marks] (the is a prepaid current asset).
Q2. How is income received in advance shown in the statement of financial position? [1 mark] As a current liability.
Exam-style practice questions
Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.
AQA 20196 marksA business pays rent of 2,000 of rent was prepaid, and at the year end $3,000 of rent was owing. Calculate the rent charge for the income statement and state the amounts shown in the statement of financial position.Show worked answer →
A full worked adjustment using both opening and closing balances.
Start from cash paid: 2,000 because it relates to this year's expense though paid last year: 2,000 = 3,000 because this year's rent is still owed: 3,000 = $29,000 charged to the income statement (4 marks for the rent account working).
Statement of financial position: the $3,000 closing accrual is a current liability; there is no closing prepayment (2 marks). Markers reward handling the opening prepayment correctly (it reverses into this year's charge) as well as the closing accrual.
AQA 20224 marksExplain how the accruals concept ensures the rent expense is correctly stated, and state where a prepaid expense appears in the financial statements.Show worked answer →
A 4-mark answer needs the concept applied plus the placement.
The accruals concept matches expenses to the period they relate to, regardless of when cash is paid; so rent owing is added to the charge and rent paid in advance is deducted, giving the cost of the rent actually used this year (2 marks).
A prepaid expense is the amount paid in advance; it is deducted from the income statement charge and shown as a current asset on the statement of financial position because it is a future benefit the business has already paid for (2 marks). Markers reward linking the adjustment to the matching concept and the correct current asset placement.
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Sources & how we know this
- AQA A-level Accounting (7127) specification — AQA (2017)