Accruals, Prepayments, Depreciation and Bad Debts
Accruals and prepayments apply the matching concept: expenses are recognised in the period they are incurred, not when paid. Depreciation allocates the cost of a non-current asset over its useful life. Bad debts are written off; a provision for doubtful debts anticipates likely losses.
Core rules
- Accrued expense: expense incurred but not yet paid → add to expense and show as a current liability.
- Prepaid expense: paid but not yet incurred → reduce expense and show as a current asset.
- Straight-line depreciation = (cost - residual value) / useful life.
- Reducing-balance depreciation = carrying amount × rate.
- Bad debt write-off: Dr Bad Debts, Cr Receivables.
- Provision: percentage of receivables after write-offs; only the movement goes to the statement of profit or loss.
Worked example
Insurance of €1,800 was paid for the 12 months to 30 June. The year end is 31 March, so 3 months are prepaid: €1,800 × 3/12 = €450. Expense for the year = €1,350, prepayment = €450.
A machine costs €12,000 with residual value €2,000 and a 5-year life. Straight-line depreciation = (12,000 - 2,000)/5 = €2,000 each year.
Receivables are €20,000 after write-offs; provision required at 5% = €1,000. If the opening provision was €800, the charge is €200.
Traps
Charging depreciation on carrying amount under straight line; calculating the provision before writing off bad debts; reversing accrual and prepayment direction; and treating the whole provision as the expense.