2. Accounting Copyright © Genetic Computer School 2007 ACC 8- 0 LESSON 8 OVERVIEW  Outstanding Liabilities  Prepaid Expenses  Accrued Income  Income Received in Advance

3. Accounting Copyright © Genetic Computer School 2007 ACC 8- 1 OUTSTANDING LIABILITIES Expenses which are incurred in the current period, whether paid or not, should be charged against the current period’s revenue. Otherwise, the current period’s net profit would be overstated. Also, the next period’s net profit would be understated, since the expenses which are actually incurred in the current period will be charged to it.

4. Accounting Copyright © Genetic Computer School 2007 ACC 8- 2 PREPAID EXPENSES Some expenses which are only incurred in the next accounting period may have been paid for by the end of the current accounting period. Hence the Trial Balance figure of that item of expense would be overstated by the amount of the prepaid expense.

5. Accounting Copyright © Genetic Computer School 2007 ACC 8- 3 ACCRUED INCOME On Balance Day, sales revenue which has been earned but for which cash has not been received is already shown in the books as debit balances in the customer’s personal accounts. This is shown as total Sundry Debtors in the Trial Balance. There are other items of income earned but for which cash has not been received. These are called “Income Accrued”.

6. Accounting Copyright © Genetic Computer School 2007 ACC 8- 4 INCOME RECEIVED IN ADVANCE Sometimes an item of income may be received by a business in the current accounting year, but part of it may be apportioned to the next accounting year. Therefore, the amount of income received in advance must not be brought to the Profit and Loss Account of the current period, for this may make the income for the current period larger than its true value.