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There are two methods for reocrding prepaid expenses. Under first method we first charge total amount paidt to Prepaid Expenses. At the year end expenses related to the period are charged to income statement by debiting Expense Account and crediting Prepaid Expense Account. This method does not need any reversal entry.
Under second method total amount paid is charged to income statement by debting it to Expense Account. Balance amount remaining after deducting current year's expense is then transferred to Prepaid Expenses Account. This method required reversal entry at the beginning of next year.
Similary, Pre-received or advance received income can be first credited to liability. Revene for the period then can be transftered to sales revenue account.
At the end of the accounting period, there may be expenses which have become due but have not yet been paid. If the organisation is following the mercantile system of accounting, these expenses are to be brought into account.
Debit » Expenditure a/c
"Expenditure a/c" is a nominal account with a debit balance. The balance in the "Expenditure a/c" generally indicates the total amount paid on account of the expenditure during the current accounting period. To bring the expenditure that has not yet been brought into account into the books, the relevant expenditure account has to be debited.
[Expenditure a/c – Nominal a/c – Debit all Expenses and Losses.]
Credit » Expenses Outstanding a/c
"Expenses Outstanding a/c" is a personal account with a credit balance. The balance in the "Expenses Outstanding a/c" indicates the amount that is owed by the organisation on account of the expenditure unpaid.
The amount of expenditure that has not yet been paid is a liability for the organisation. The persons to whom the organisation owes is its creditor. As such, the amount of expenditure outstanding that has not yet been taken into the books is credited to the "Expenditure Outstanding a/c."
[Outstanding Expenditure a/c – Personal a/c – Credit the benefit giver.]
At the end of the accounting period, there may be incomes which have become due but have not yet been received. If the organistion is following the mercantile system of accounting, these incomes are to be brought into account.
Credit » Income a/c
"Income a/c" is a nominal account with a credit balance. The balance in the "Income a/c" generally indicates the total amount received on account of the income during the current accounting period. To bring the income that has not yet been brought into account into the books, the relevant income account has to be credited.
[Income a/c – Nominal a/c – Credit all Incomes and Gains.]
Debit » Income Receivable a/c
The income receivable is indicative of an amount that is owed to the organisation by a person or organisation. The persons who owe to the organisation are its debtors.
Thus amount of income receivable is debited to the "Income Receivable a/c".
[Income Receivable a/c – Personal a/c – Debit the benefit receiver.]
If income is lower than receivables increase income by reducing expenses if income is higher than expenses invest the balance.
