Paragraph Why is it important to include the expense incurred in the period in the statement of profit or loss, rather than the cash paid or the bills received? 2 What is an accrual? 2.1 3 What do we call an expense that has been paid in advance of the period to which it relates? 3.1 4 Explain how a single expense can have an accrued element and a prepaid element. 4.1 5 Is rental income received in advance brought down as a debit or a credit balance at the period end? 5.3 6 How are accruals and prepayments shown in the statement of financial position? 6.1 7 What effect will an accrual have on the amount of an expense included in the statement of profit or loss? 6.2 EXAM-STYLE QUESTIONS 1 Alan has an accounting year that ends on 30 June. He has paid rent of $4,500 for the three months to 31 August. What accrual or prepayment is required when preparing accounts for the year ended 30 June? A Accrual of $1,500 B Accrual of $3,000 C Prepayment of $1,500 D Prepayment of $3,000 2 Tina has an accounting year that ends on 31 March. She estimates that as at 31 March, her sales staff have earned sales commission of $4,000 which has not yet been recorded in the accounts. How should the accrual or prepayment be accounted for when preparing the statement of profit or loss for the year to 31 March? A Debit Accrual $4,000, Credit Commissions $4,000 B Debit Prepayment $4,000, Credit Commissions $4,000 C Debit Commissions $4,000, Credit Prepayment $4,000 D Debit Commissions $4,000, Credit Accrual $4,000