prepare ledger accounts and journal entries to record accrued and prepaid incomes

4.3 Other Payables and Other Receivables

4.3.1 Why the matching principle matters

The Cambridge IGCSE Accounting syllabus requires learners to recognise the importance of matching costs and revenues. Accrued and prepaid adjustments are the practical means of applying the matching principle:

• Revenue is recognised in the period in which it is earned (accrued income) or when the service is performed (prepaid income).
• Expense is recognised in the period in which it is incurred (accrued expense) or when the benefit is consumed (prepaid expense).
• These adjustments ensure that the Statement of Financial Position shows the correct amounts of assets and liabilities at the reporting date.

4.3.2 Key definitions (Cambridge terminology)

• Accrued Income – Income that has been earned but not yet received in cash; recorded as a receivable.
• Accrued Expense – Expense that has been incurred but not yet paid; recorded as a liability.
• Prepaid Income (also called Deferred Income) – Cash received before the related service is performed; recorded as a liability.
• Prepaid Expense – Cash paid before the related benefit is received; recorded as an asset.

4.3.3 Journal entries for the four adjustments

4.3.4 Ledger posting – a consolidated example

Below is a single set of journal entries that includes one of each adjustment, followed by the corresponding ledger extracts and the effect on the trial balance.

Ledger extracts

Effect on the trial balance

4.3.5 Reversal entries (optional but good practice)

At the start of the next accounting period, accrued items are often reversed so that the same expense or income is not recorded twice.

• Reversing accrued income:
  Debit Accrued Income (Revenue) £1 200
  Credit Accrued Income – Receivable £1 200
• Reversing accrued expense:
  Debit Accrued Expense (Liability) £800
  Credit Wages Expense £800

If the entry is not reversed, the original accrued amount must be retained and the cash receipt/payment recorded against the existing accrued balance.

4.3.6 Impact on the Statement of Financial Position

• Accrued Income – recorded as a current asset (Accounts Receivable – Accrued Income).
• Accrued Expense – recorded as a current liability (Accrued Expense).
• Prepaid Income – recorded as a current liability (Prepaid Income).
• Prepaid Expense – recorded as a current asset (Prepaid Expense).

These balances appear under the appropriate headings (Assets or Liabilities) in the balance sheet at the reporting date.

4.3.7 Common error‑checking points

• Have you debited the correct account and credited the correct account?
• For accrued items, is a receivable (asset) or liability created at period‑end?
• For prepaid items, is the liability (prepaid income) or asset (prepaid expense) created when cash is received or paid?
• Does the trial balance still balance after each adjustment?
• If you use reversal entries, are they dated the first day of the next period and mirror the original accrued entry?

4.3.8 Worked example – both income and expense

Scenario

• 1 May – cash of £3 600 received for a 12‑month cleaning contract (service performed evenly each month).
• 31 May – wages of £1 200 incurred for work performed; payment will be made on 10 June.

Journal entries

1. Receipt of cash (prepaid income)
   Debit Cash £3 600
   Credit Prepaid Income £3 600
2. Revenue recognition for May (1/12 of contract)
   Debit Prepaid Income £300
   Credit Cleaning Revenue £300
3. Accrued wages at 31 May
   Debit Wages Expense £1 200
   Credit Accrued Expense £1 200
4. Cash payment of accrued wages on 10 June
   Debit Accrued Expense £1 200
   Credit Cash £1 200

Selected ledger extracts

4.3.9 Summary box