ZIMSEC O Level · Principles of Accounts · Form 4
Final accounts follow the accruals principle: income and expenses belong to the period in which they are earned or incurred.
Accruals and prepayments
- Accrued expense (owing): add to the expense; show as a current liability.
- Prepaid expense (paid in advance): subtract from the expense; show as a current asset.
Worked example: Rent paid during the year was US$2 200 and US$200 is still owing. Insurance paid was US$1 800, of which US$300 is for next year. Find the amounts charged.
Rent = 2 200 + 200 = US$2 400 (accrual 200 under current liabilities)
Insurance = 1 800 − 300 = US$1 500 (prepayment 300 under current assets)
Depreciation
The fall in value of a non-current asset.
- Straight line: (cost − residual value) ÷ useful life. Cost 10 000, residual 2 000, 4 years → 2 000 per year.
- Reducing balance: a percentage of the net book value. 20% of 10 000 = 2 000 in year 1; 20% of 8 000 = 1 600 in year 2.
Bad debts and allowance for doubtful debts
- Bad debts written off are an expense.
- An allowance for doubtful debts is deducted from receivables; an increase in the allowance is an expense, a decrease is income.
Exam tip: Each adjustment has TWO effects – one in the income statement and one in the statement of financial position.
Check yourself
- Wages paid US$5 000; owing US$400. How much is charged as wages?
- A van cost US$12 000 and is depreciated at 25% per year reducing balance. Find year 2 depreciation.
- Where is a prepayment shown in the statement of financial position?
Show answers
- US$5 400
- Year 1: 3 000 (NBV 9 000); year 2: 2 250.
- Under current assets.
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