Accrued & Prepaid Expenses (Cambridge (CIE) IGCSE Accounting): Revision Note

An accrued expense is an expense that is still owed at the end of a financial period

• This is also called an accrual

• The expense is in arrears

Accrued expenses can occur at the end of a financial period when a business pays less than the amount due in that period

• This usually happens when the invoice period of an expense does not align with the financial period of the business

• The business might pay at the end of the invoice period

  • However, this might be after the end of current financial period

An accrued expense is a liability to the business

• The business owes money

The expense account will have a credit balance if there is an accrual at the end of the financial period

• This indicates that it is a liability, as the business still owes money for that period

The full amount that is due for the period is stated on the statement of profit or loss

The amount that is accrued appears on the statement of financial position as a current liability

• It is included in the amount for other payables

A prepaid expense is an expense for the next financial period that is paid in advance during the current financial period

• This is also called a prepayment

Prepaid expenses can occur at the end of a financial period when a business pays more than the amount due in that period

• This commonly happens when the invoice period of an expense does not align with the financial period of the business

• The business might pay an expense in full as soon as they receive an invoice

  • However, this invoice might also cover part of the next financial period

A prepaid expense is an asset to the business

• The business has paid too much to the supplier for that period

• Technically, the business is owed money by the supplier 

The expense account will have a debit balance if there is a prepayment at the end of the financial period

• This indicates that it is an asset, as the business has already made payments that relate to the next financial period

The full amount that is due for the period is stated on the statement of profit or loss

The amount that is prepaid appears on the statement of financial position as a current asset

• It is included in the amount for other receivables