The trial balance in Table 3.7 was extracted from the records of Nick's Office Supplies as at 31 December 2011.

Additional information as at 31 December 2011:
1. The loan carries interest at 10%, and no interest has been paid during the year.
2. Inventories held were valued at £38,600.
3. Electricity owing amounted to £1,200.
REQUIRED:

a) Explain what is meant by a prepayment and how it is accounted for.

b) Explain what is meant by an accrual and how it is accounted for.

c) Prepare the income statement for Nick's Office Supplies for the year ended 31 December 2011.

d) Prepare the statement of financial position for the business as at that date.

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Table 3.7 Debit Credit Capital 208,160 Loan 10,000 Inventories at 1 January 2011 27,440 Sales 477,600 Purchases 322,400 Wages Advertising 83,630 4,400 Electricity 5,050 Insurance 16,080 Premises 154,000 Office equipment 27,900 Bank balance 37,700 Trade payables 61,720 Trade receivables 51,880 Drawings 27,000 757,480 757,480