Accruals and Prepayments


The overriding criteria when preparing accounts, is that the Statement of Comprehensive Income  must give a true and fair view of the profit or loss earned for the period and that the Statement of Financial Position must give a true and fair view of the position of the entity at a specified date.  In order to achieve this true and fair view, a number of concepts were introduced and are followed.  These are:

Going Concern


Continuity of the entity in its present form for the foreseeable future – there is no intention to put the company into liquidation or drastically to cut back the scale of operations


Cautious presentation of the entity’s financial position. Profits are recognised only when realised while losses are provided for as soon as they are foreseen


Revenue earned in the period matched with costs incurred in earning it, not as money is received or paid


There is similar accounting treatment of like items within each accounting period and from one period to the next


The accounts recognise the business as a distinct separate entity from its owners
Money Measurement


Accounts only deal with those items to which a  monetary value can be attributed
Materiality If omission, misstatement or non-disclosure affects the view given, item is material and disclosure is required


Substance over Legal 

Form        Recognises economic substance from legal form e.g. assetsacquired on hire purchase

Stable Monetary Unit        The value of the monetary unit used is consistent over time

Accounting Periods        Accounts are prepared for discrete time periods

On examination of the definition of the “Accruals” concept – revenue earned in the period matched with costs incurred in earning it, and not as money is received or paid – the entire concept of accruals and prepayments is born.  In other words,  the profit as reported for a period will include some invoices/expenses not yet received but the costs of which relate to the period – accrued expenses – while some invoices cover a period of time beyond the time frame of the present accounts – pre-payments or payments in advance.


Leading on from accruals and prepayments, in order to insure the accounts give a true and fair view, certain provisions may have to be created.  Examples could include:

  • Bad debts,
  • Provision for bad debts,
  • Bad debts recovered and
  • Provisions for discounts – both discount allowed and received. 


The overriding criterion is the prudence concept – provide for all bad debts.  Such bad debts are written off as an expense in the Statement of Comprehensive Income .  A provision for bad debts is an estimate of the expense for bad debts.  The amount of the initial provision is charged to the Statement of Comprehensive Income .  When a provision exists but is subsequently increased, the amount of the increase is a charge in the Statement of Comprehensive Income .  When a provision exists and is reduced, the decrease is recorded in Statement of Comprehensive Income  as income or as a reduction in the bad debt expense.  The Statement of Financial Position must also be adjusted.  The value of Trade Receivables should be shown in the Statement of Financial Position after deducting the bad debt provision (in full not just the change in the provision).


When a company sells goods/services, the effect of which is to

DR Trade Receivables

CR Sales

When the cash/cheque has been received, the effect is

DR Bank

CR Trade Receivables

The company who has purchased the goods/services records these transactions as follows:

DR Purchases

CR Trade Payables

When the company makes payment to the creditor

DR Trade Payables

CR Bank

With each sale, there is a risk associated with it – that is the risk that the money may not be received i.e. that the debtor may not pay.  From time to time, entities within an industry go bankrupt or are put into liquidation.  The result of which is that the payables may get not paid at all or get x Rwandan Francs for every RWF1,000 due.  From the suppliers’ view, some entries must be posted in the accounts to adjust for this.


Where the liquidator states that x Rwandan Francs in the RWF1 will be paid, prudence prevails – profits are recognised only when realised while losses are provided for as soon as they are foreseen – and the above journal should still be posted.  On receipt of the x Rwandan Francs, the amount can be dealt as a bad debt recovered.  The journal entry is:


DR             Trade Receivables – with the amount received

CR            Bad Debts recovered






Bank – with the amount received   CR   Trade Receivables

The amount received is posted to the trade receivables individual account twice.  Once when notification is received from the liquidator stating the amount and date when it will be paid to acknowledge monies due and on the second time, then the actual amount is received.  This is to ensure maximum information in relation to the trade receivables is available on the Trade Receivables’ individual account.  It also complies with the prudence concept.

At the end of the period, the balance on the bad debt recovered is transferred to the Statement of Comprehensive Income  as revenue.


From time to time, the management of the company will review outstanding Trade Receivables to assess their collectability.  Any known bad debts are written off as described above.  Management may concede that while all known bad debts are written off, there may be other Trade Receivables who will not pay the full debt.  In these instances, a provision for bad debts is created.  There are two types of provisions:




Specific provision


General provision


A specific provision is created where individual accounts throughout the Trade Receivables’ ledger are identified where invoices are under dispute and either the full amount of the invoice or part of the invoice will remain unpaid.  A list of Trade Receivables’ names, together with the amount, is compiled and totalled.  The total amount is the amount to be provided by way of specific provision.


A general provision is created where no one individual account can be identified where invoices are subject to dispute.  The provision is created on a generalisation that x% of Trade Receivable will not pay.  


Irrespective of whether the provision is a specific or a general provision, the journal entries are still the same.  To create an opening provision, the journal entries are:


DR Statement of Comprehensive Income  –

Provision for Bad Debts

CR Provision for Bad Debts Account


A company’ management may provide for other costs and revenues, by way of provisions.  The most common are discount allowed and discount received but there may be others.  However, the accounting treatment will be similar throughout.

There are two types of discounts – trade discounts and cash discounts.  A trade discount is a discount which is given when the sale transaction is being completed between two parties of the same or linked trades.  A cash discount is given on settlement of the debt if settlement is within a specified period of time.  For example, two people go into a timber merchant’s yard.  One person works in the trade, the other not.   The trade discount would normally be given to the person who works in the trade while the one not working in the trade must pay the full price.  Both agree to pay immediately.  Both may now get the cash discount.  So, in hindsight, the person who works in the industry gets both the trade discount and the cash discount while the person who works outside the trade only gets the cash discount.

Irrespective of whether the discount is a trade discount or a cash discount, a company may give a discount to their trade receivables – discount allowed – or receive a discount from their trade payables – discount received.   At period end the management must review both the Trade Receivables accounts and the Trade Payables accounts to estimate the amount of discounts involved.  Once agreed upon, the necessary journal entries must be made.


Where a discount is being established for the first year, the journal entry is:

DR Provision for Discount Allowed – Statement of Comprehensive Income

CR Provision for Discount Allowed Account

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