Incomplete Records

Finding Expense Figures Using Ledger Accounts

Why Reconstruct Expense Accounts?

When expenses have been paid in cash or by bank but accruals or prepayments exist, the bank figure alone does not equal the income statement charge. Reconstruct the expense ledger account to find the correct IS figure.

Accrued Expense

An accrual means the expense is owed at the year end — it has been incurred but not yet paid.

Expense Account (accrued)
Dr                                  Cr
Bank (amount paid)        x    Bal b/d (accrual b/d — last year's) x
Bal c/d (accrual c/d)    x    Income statement (missing)           x
                         ──                                         ──
                          x                                          x

Shortcut formula (accrued):

IS charge = Bank paid + Closing accrual − Opening accrual

• Bal b/d accrued: last year's expense paid this year → deduct (already charged last year)
• Bal c/d accrued: this year's expense not yet paid → add (belongs to this year)

Prepaid Expense

A prepayment means some of the cash paid relates to next year.

Expense Account (prepaid)
Dr                                  Cr
Bal b/d (prepayment b/d)  x    Income statement (missing)          x
Bank (amount paid)        x    Bal c/d (prepayment c/d)            x
                         ──                                         ──
                          x                                          x

Shortcut formula (prepaid):

IS charge = Bank paid + Opening prepayment − Closing prepayment

• Bal b/d prepaid: paid last year for this year → add (belongs to this year)
• Bal c/d prepaid: paid this year for next year → deduct (does not belong to this year)

Worked Example — Jan Bilboa (year ended 31 January 2014)

Motor expenses (accrued):

• IS charge = 8 165 + 460 − 80 = 8 545

Rates (prepaid):

• IS charge = 1 535 + 120 − 145 = 1 510

Memory aid: For accruals → add the closing balance, deduct the opening balance. For prepayments → add the opening balance, deduct the closing balance.