Balancing the books

By THIS IS MONEY
Updated:

 

WHAT is meant by 'Prepayments and accrued income' shown under 'debtors', and 'Accruals and deferred income' shown under 'creditors' on the balance sheet? JT, London.

Maurice Fitzpatrick at accountants Tenon says: Prepayments and accrued income are classed as assets.

A prepayment typically arises when, for instance, a company with a 31 December year-end has a fleet of vehicles on which it has paid the road tax up to 31 July the following year. So seven-twelfths of the total amount of tax (representing the seven months from January to July) is carried over into the next accounting year.

Accrued income arises when for some reason the company has not yet invoiced for an item, but nevertheless there is a reason for bringing the income arising from the transaction into the current year's accounts. It means you are setting up 'virtual' debtor despite the fact that you have not billed them.

Accruals and deferred income are placed on the liabilities side of the balance sheet. An accrual may arise when, for instance, a company with a 31 December year-end paid its last gas bill on 31 October 31. The accrual represents the estimate of what the gas bill will be for the last two months up to the year-end.

Deferred income arises when, for instance, a company has billed something but part of the income from it may have to be given back. This is common among insurance broking companies which get commission from insurance providers, but the commission income is subject to clawback if the policy is later cancelled. As a result the income cannot all be recognised in the current year-end even if it had been received.

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