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Adjustments and the Matching Principle
Quick questions on Accruals and prepayments: N(A)-Level Principles of Accounts
6short Q&A pairs drawn directly from our worked dot-point answer. For full context and worked exam questions, read the parent dot-point page.
What are accrued expenses?Show answer
An accrued expense is a cost that has been incurred but not yet paid by the year end (for example, December wages paid in January). Because it belongs to this period:
What are prepaid expenses?Show answer
A prepaid expense is a payment made now for a benefit in a future period (for example, insurance paid for next year). Because it does not belong to this period:
What are income adjustments?Show answer
The same idea works for income. Income owing to us (accrued income) is added to income and shown as a current asset; income received in advance is subtracted and shown as a current liability, because we still owe the service.
What is q1?Show answer
State whether an accrued expense is a current asset or a current liability. [1 mark]
What is q2?Show answer
Wages paid were \9\,000\ is owing at the year end. Find the wages expense. [2 marks]
What is q3?Show answer
Explain why a prepayment is subtracted from this year's expense. [2 marks]
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