O Level Accounting Topical Past Paper Solution - 7707 Paper 11 May/June 2024 - Q15 Accrued & Prepaid

In this video, I explain the solution to question 15 from the O Level Accounting past paper 7707, May/June 2024, focusing on accrued and prepaid income. This topic is essential for understanding how to handle accruals and prepayments in accounting. It relates to the concepts of rent receivable, accrued income, and prepaid income, which are crucial when preparing financial statements.

The question requires you to determine the correct entry made in the income statement for rent receivable. This involves analyzing a rent receivable ledger account, which shows both the opening and closing balances along with the bank transactions. Through this, I will guide you on how to handle accrued and prepaid income, accruals, and other accounting adjustments.

Question Statement:
The following ledger account appeared in the books of a trader:
Rent receivable account
Debit Side:
2020 Dec 31 balance c / d $600
Credit Side:
2020 Jan 1 balance b / d $400
2020 Dec 31 Bank $3600

Which entry was made in the income statement for the year ended 31 December 2020 for rent receivable?
A. $3400 credit
B. $3400 debit
C. $3800 credit
D. $3800 debit

I will demonstrate how to apply the principles of accrued and prepaid expenses, accrued income, and prepayment to solve this question. Additionally, I’ll discuss how these concepts play a role in accrual accounting, and how adjusting for outstanding and prepaid expenses or income impacts the financial statements.

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Accrued and prepaid expenses, as well as accrued and prepayment transactions, are fundamental concepts in accrual accounting. Accrued expenses refer to costs that have been incurred but not yet paid, while prepaid expenses represent payments made in advance for services or goods to be received in the future. Accrued and prepaid income works similarly, with accrued income representing earnings that have been earned but not yet received, and prepaid income or unearned income reflecting payments received in advance for services yet to be performed. Accrual and prepayment entries are essential for accurate financial reporting, and they are adjusted in journal entries. Outstanding and prepaid expenses further highlight the timing of payments, with outstanding expenses referring to obligations that have yet to be settled. A prepayment account is used to track payments made in advance, while accruals in general refer to the recognition of revenues and expenses when they are earned or incurred, rather than when cash is exchanged. Accrued income and accrued expense entries are necessary to align with the accrual basis of accounting, which contrasts with the cash basis of accounting, where transactions are recorded when cash changes hands.

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[muhammadmustafa]

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