Sole Trader Accounts

Prepayments, Accruals and Income Adjustments

These adjustments apply the accruals (matching) concept — income and expenditure are matched to the period in which they are earned or incurred, not when cash is received or paid.

Prepaid Expense (Prepayment)

An expense paid in advance — paid this year but not incurred until next year. Examples: insurance, rent paid in advance.

Example: Insurance in trial balance = £2 700; insurance pre-paid = £350. Income statement expense = 2 700 − 350 = £2 350 SFP current asset: Prepaid insurance £350

Accrued Expense (Accrual)

An expense paid in arrears — incurred this year but not paid until next year. Also described as: owing, outstanding, unpaid. Examples: wages, light and heat, telephone, interest.

Example: Motor expenses in trial balance = £8 135; motor expenses accrued = £300. Income statement expense = 8 135 + 300 = £8 435 SFP current liability: Accrued motor expenses £300

Accrued Income (Income Due)

Income earned this year but received next year (in arrears / owing / due / outstanding). Examples: interest receivable, commission receivable.

Example: Commission received in trial balance = £2 500; commission receivable owing = £500. Income statement income = 2 500 + 500 = £3 000 SFP current asset: Accrued commission £500

Prepaid Income (Income Received in Advance)

Income received this year but earned next year (in advance). Examples: rent received in advance.

Example: Rent received in trial balance = £4 250; rent receivable paid in advance = £600. Income statement income = 4 250 − 600 = £3 650 SFP current liability: Prepaid rent receivable £600

Summary Table