Accruals and prepayments in practice
For expenses, add accruals and deduct prepayments. For income, add amounts earned but not received and deduct amounts received in advance.
Worked example 1: prepaid rent
A shop's trial balance at 31 March 2026 shows rent paid of Rs. 390,000. The rent is Rs. 30,000 a month. Find the rent expense and the prepayment, and write the adjusting entry.
- Rent for 12 months: 12 × 30,000 = 360,000.
- Prepayment: 390,000 − 360,000 = 30,000 (April 2026 rent paid early).
- Adjusting entry: Dr Prepaid rent 30,000; Cr Rent 30,000.
- Check: 390,000 − 30,000 = 360,000 = 12 × 30,000.
Income statement: rent Rs. 360,000. SFP: prepaid rent Rs. 30,000 under current assets.
Worked example 2: accrued electricity
Electricity of Rs. 66,000 has been paid for 11 months. The March 2026 bill of Rs. 6,500 is unpaid at 31 March 2026.
- Accrued expense: the unpaid March bill, 6,500.
- Adjusting entry: Dr Electricity 6,500; Cr Accrued electricity 6,500.
- Expense for the year: 66,000 + 6,500 = 72,500.
Income statement: electricity Rs. 72,500. SFP: accrued electricity Rs. 6,500 under current liabilities.
Worked example 3: insurance paid for a year
On 1 October 2025 a business paid Rs. 48,000 for one year's insurance and debited Insurance. The year ends on 31 March 2026.
- Monthly cost: 48,000 ÷ 12 = 4,000.
- Used, October to March: 6 × 4,000 = 24,000.
- Unused, April to September 2026: 6 × 4,000 = 24,000.
- Adjusting entry: Dr Prepaid insurance 24,000; Cr Insurance 24,000.
- Check: 24,000 + 24,000 = 48,000.
Insurance expense Rs. 24,000; prepaid insurance Rs. 24,000 (current asset).
Worked example 4: income received in advance
On 1 January 2026 a tuition centre received Rs. 90,000 for six months of classes (January to June) and credited Unearned fees. The year ends on 31 March 2026.
- Monthly fee: 90,000 ÷ 6 = 15,000.
- Earned, January to March: 3 × 15,000 = 45,000.
- Adjusting entry: Dr Unearned fees 45,000; Cr Fee income 45,000.
- Still unearned: 90,000 − 45,000 = 45,000.
Fee income Rs. 45,000; unearned fees Rs. 45,000 shown as a current liability.
Worked example 5: accrued income and accrued salaries
At 31 March 2026: (a) commission of Rs. 18,000 was earned in March but will be received in April; (b) salaries of Rs. 25,000 for the last week of March are unpaid. Write the adjusting entries and state the effect on profit.
- (a) Dr Commission receivable 18,000; Cr Commission income 18,000.
- (b) Dr Salaries 25,000; Cr Accrued salaries 25,000.
- Effect on profit: + 18,000 − 25,000 = − 7,000.
Commission receivable Rs. 18,000 (current asset); accrued salaries Rs. 25,000 (current liability); profit falls by Rs. 7,000.
Summary: where each adjustment goes
| Adjustment | Income statement | Statement of financial position |
|---|---|---|
| Accrued expense | Add to the expense | Current liability |
| Prepaid expense | Deduct from the expense | Current asset |
| Accrued income | Add to the income | Current asset |
| Income received in advance | Deduct from the income | Current liability |
Shops in Colombo often pay rent several months in advance, while CEB electricity bills arrive after the month ends. At 31 March the accountant shows the advance rent as a prepayment and the unpaid bill as an accrual.
Short answer: “How is a prepaid expense shown in the financial statements?” It is deducted from the expense in the income statement and shown as a current asset in the statement of financial position.
Structured question: “Calculate the expense for the year and the prepayment or accrual for the given items, and write the adjusting entries.” Work out the amount for the period, treat the difference as prepaid or accrued, then give the journal entry and both statement effects.
Expenses: add accrued, deduct prepaid. Income: add accrued, deduct received in advance. Accrued expenses and advance income are liabilities; prepaid expenses and accrued income are assets.