How does the accrual basis create accrued and prepaid items at balance day, and how are revenues and expenses adjusted to the correct period?
Record balance day adjustments for accrued expenses, prepaid expenses, accrued revenue and revenue received in advance, and explain how each adjustment affects profit and the balance sheet
WACE Year 12 Accounting and Finance Unit 3 on accruals and prepayments: recording accrued expenses, prepaid expenses, accrued revenue and revenue received in advance under the accrual basis, and explaining the effect of each on profit and the balance sheet.
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What this dot point is asking
SCSA wants you to record all four adjustments, classify the resulting balance correctly, and explain the effect on profit and the balance sheet.
The accrual basis
The four adjustments
The two expense adjustments fix the Income Statement expense and create either a liability (accrued) or an asset (prepaid). The two revenue adjustments fix revenue and create either an asset (accrued) or a liability (received in advance).
Effect on the statements
Each adjustment changes profit and changes the balance sheet by the same logic. Recognising an accrued expense raises expenses, so it lowers profit, and it adds a liability. Recognising accrued revenue raises revenue, so it raises profit, and it adds an asset. Prepayments and revenue in advance work the same way in reverse. The double entry guarantees the balance sheet still balances.