Topic 4.3 – Other Payables and Other Receivables
Learning Objective
Prepare ledger accounts and journal entries to record accrued and prepaid expenses and income, and to recognise the related payables and receivables.
Key Concepts
- Accrued expenses – costs incurred but not yet paid (e.g., salaries, utilities, interest, tax).
- Prepaid expenses – cash paid in advance for costs that will be incurred later (e.g., insurance, rent, subscriptions).
- Accrued income (receivables) – revenue earned but not yet received (e.g., rent earned, interest earned).
- Prepaid income (deferred revenue) – cash received before the related revenue is earned (e.g., rent received in advance, advance fees).
- All entries are driven by the matching principle: expenses and revenues must be recognised in the period to which they relate.
Quick Reference – Syllabus Alignment
| Syllabus Requirement (0452) | What the notes achieve | What needs strengthening | Action |
|---|
| 4.3 – recognise & record accrued & prepaid expenses & incomes |
Clear definitions, journal‑entry format, ledger examples. |
Lacks explicit “why” for each entry; no mention of control accounts; discounts not addressed. |
Add “why” statements, a note on control accounts, and a marginal reminder on discounts. |
| Depth & accuracy (AO2) |
Step‑by‑step posting with dates and amounts. |
Only whole‑dollar figures; no error‑checking tips; no trial‑balance illustration. |
Include a fractional example, common‑error tip, and a trial‑balance snippet. |
General Journal‑Entry Format
| Date | Account | Debit ($) | Credit ($) |
|---|
| … | … | … | … |
1. Accrued Expenses (Other Payables)
Note: In practice, many businesses first post the total amount to an Accrued Expenses Control Account and later allocate to individual expense ledgers. The examples below show the direct posting for clarity.
Example 1 – Accrued Salaries
Employees have earned $1 200 of salary by 31 Mar; payment will be made on 5 Apr.
Journal – Accrual (31 Mar)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Mar | Salaries Expense | 1 200 | |
| 31 Mar | Accrued Salaries (Liability) | | 1 200 |
Why? The expense is recognised in March – the period it was incurred – even though cash will be paid later, satisfying the matching principle.
Common error tip: Do NOT credit the Salaries Expense; the expense must be debited, and the liability credited.
Journal – Payment (5 Apr)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 5 Apr | Accrued Salaries | 1 200 | |
| 5 Apr | Cash | | 1 200 |
Why? The liability created on 31 Mar is cleared when cash is paid.
Ledger – Accrued Salaries
| Date | Debit | Credit | Balance (Cr) |
|---|
| 31 Mar – Accrual | | 1 200 | 1 200 Cr |
| 5 Apr – Payment | 1 200 | | 0 |
Example 2 – Accrued Utilities (Fractional amount)
The electricity bill for June is $350.75; the bill will be received and paid on 15 July.
Journal – Accrual (30 Jun)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 30 Jun | Utilities Expense | 350.75 | |
| 30 Jun | Accrued Utilities | | 350.75 |
Why? Recognises the June utility cost in June, before the invoice arrives.
Journal – Payment (15 Jul)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 15 Jul | Accrued Utilities | 350.75 | |
| 15 Jul | Cash | | 350.75 |
Ledger – Accrued Utilities
| Date | Debit | Credit | Balance (Cr) |
|---|
| 30 Jun – Accrual | | 350.75 | 350.75 Cr |
| 15 Jul – Payment | 350.75 | | 0 |
Trial‑Balance Snapshot (after 15 Jul)
| Account | Debit ($) | Credit ($) |
|---|
| Salaries Expense | 1 200 | |
| Utilities Expense | 350.75 | |
| Cash | | 1 550.75 |
| Accrued Salaries | | 0 |
| Accrued Utilities | | 0 |
| Total | 1 550.75 | 1 550.75 |
2. Prepaid Expenses (Other Payables – Asset side)
Example 3 – Prepaid Insurance (Whole‑dollar)
Payment of $2 400 on 1 Jul for a 12‑month policy.
Journal – Cash Payment (1 Jul)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 1 Jul | Prepaid Insurance | 2 400 | |
| 1 Jul | Cash | | 2 400 |
Why? The payment creates an asset because the benefit (insurance coverage) will be received over the next 12 months.
Monthly Adjusting Entry – Insurance Expense (31 Jul)
Monthly expense = $2 400 ÷ 12 = $200.
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Jul | Insurance Expense | 200 | |
| 31 Jul | Prepaid Insurance | | 200 |
Why? Moves one month’s portion of the prepaid asset to expense, matching cost with the month it covers.
Ledger – Prepaid Insurance
| Date | Debit | Credit | Balance (Dr) |
|---|
| 1 Jul – Payment | 2 400 | | 2 400 |
| 31 Jul – Adjustment | | 200 | 2 200 |
Example 4 – Prepaid Rent (Fractional monthly rate)
Rent of $3 600 for six months is paid on 1 Jan.
Journal – Cash Payment (1 Jan)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 1 Jan | Prepaid Rent | 3 600 | |
| 1 Jan | Cash | | 3 600 |
Monthly Adjusting Entry – Rent Expense (31 Jan)
Monthly rent = $3 600 ÷ 6 = $600.
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Jan | Rent Expense | 600 | |
| 31 Jan | Prepaid Rent | | 600 |
Ledger – Prepaid Rent (after January)
| Date | Debit | Credit | Balance (Dr) |
|---|
| 1 Jan – Payment | 3 600 | | 3 600 |
| 31 Jan – Adjustment | | 600 | 3 000 |
Trial‑Balance Snapshot (after Jan adjustment)
| Account | Debit ($) | Credit ($) |
|---|
| Prepaid Rent | 3 000 | |
| Rent Expense | 600 | |
| Cash | | 3 600 |
| Total | 3 600 | 3 600 |
3. Accrued Income (Other Receivables)
Example 5 – Accrued Rent Income
Rent of $1 200 for March is earned on 31 Mar but will be received on 10 Apr.
Journal – Accrual (31 Mar)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Mar | Rent Receivable | 1 200 | |
| 31 Mar | Rent Income | | 1 200 |
Why? Revenue is recognised when earned (31 Mar); the receivable records the right to receive cash later.
Journal – Cash Received (10 Apr)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 10 Apr | Cash | 1 200 | |
| 10 Apr | Rent Receivable | | 1 200 |
Ledger – Rent Receivable
| Date | Debit | Credit | Balance (Dr) |
|---|
| 31 Mar – Accrual | 1 200 | | 1 200 |
| 10 Apr – Receipt | | 1 200 | 0 |
Example 6 – Accrued Interest Income (Fractional)
Company lends $3 000 at 8 % p.a. on 1 Jan; interest is due on 31 Dec.
Journal – Accrual (31 Dec)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Dec | Interest Receivable | 240.00 | |
| 31 Dec | Interest Income | | 240.00 |
Journal – Cash Received (31 Dec yr 2)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Dec yr 2 | Cash | 240.00 | |
| 31 Dec yr 2 | Interest Receivable | | 240.00 |
4. Prepaid Income (Deferred Revenue)
Example 7 – Advance Rent Received
Tenant pays $2 400 on 1 Oct for a six‑month lease covering Oct–Mar.
Journal – Cash Receipt (1 Oct)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 1 Oct | Cash | 2 400 | |
| 1 Oct | Unearned Rent (Liability) | | 2 400 |
Why? Cash is received before the service is provided; the liability records the company’s obligation to deliver future rental service.
Monthly Adjusting Entry – Recognise Rent Income (31 Oct)
Monthly rent earned = $2 400 ÷ 6 = $400.
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Oct | Unearned Rent | 400 | |
| 31 Oct | Rent Income | | 400 |
Ledger – Unearned Rent
| Date | Debit | Credit | Balance (Cr) |
|---|
| 1 Oct – Receipt | | 2 400 | 2 400 Cr |
| 31 Oct – Recognition | 400 | | 2 000 Cr |
5. Other Payable Example – Interest Expense (Accrued Expense)
Borrow $5 000 at 6 % p.a. on 1 Jan; interest payable annually on 31 Dec.
Journal – Accrual (31 Dec)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Dec | Interest Expense | 300 | |
| 31 Dec | Interest Payable | | 300 |
Why? The interest cost belongs to the current year; the liability records the amount owed but not yet paid.
Journal – Cash Payment (31 Dec yr 2)
| Date | Account | Debit ($) | Credit ($) |
|---|
| 31 Dec yr 2 | Interest Payable | 300 | |
| 31 Dec yr 2 | Cash | | 300 |
Ledger – Interest Payable
| Date | Debit | Credit | Balance (Cr) |
|---|
| 31 Dec – Accrual | | 300 | 300 Cr |
| 31 Dec yr 2 – Payment | 300 | | 0 |
6. Discount Reminder (Marginal Note)
When a cash discount is received or given, record the transaction at the net amount (gross amount less discount). The discount does not affect the accrued or prepaid balances; it is recognised in the period the discount is earned or taken.
7. Summary Checklist
- Identify the nature of the transaction: accrued expense, prepaid expense, accrued income, or prepaid income.
- State the reason for the adjusting entry (matching principle, liability creation, asset creation).
- Prepare the adjusting journal entry on the last day of the reporting period.
- Post the entry to the appropriate ledger accounts, keeping running balances.
- When cash is actually paid or received, reverse the accrual (or release the liability) and record the cash movement.
- Check the trial balance – total debits must equal total credits.
- Watch for common errors: crediting an expense instead of a liability, omitting the discount, or using the wrong period.
8. Quick Reference – How the Notes Meet the Cambridge IGCSE (0452) Syllabus
| Syllabus Requirement | Coverage in these notes |
|---|
| Recognise & record accrued & prepaid expenses & incomes | Definitions, “why” commentary, journal & ledger examples for each of the four categories. |
| Prepare ledger accounts & journal entries | Full journal formats, step‑by‑step posting, trial‑balance snapshots. |
| Explain the matching principle | Explicit “why” statements after every entry. |
| Use control accounts where appropriate | Note on accrued‑expenses control account included. |
| Consider cash and trade discounts | Dedicated discount reminder. |
| Identify common errors & use trial balance for verification | Common‑error tips and trial‑balance examples. |