Theory question 103
Accruals and Prepayments(a) State three effects of drawings on the business of a sole proprietor.
(b) Explain how the following items are treated in the balance sheet: (i) accrued expenses; (ii) prepaid expenses; (iii) accrued income.
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(a) Any three: reduces the owner's capital; reduces cash/stock available to the business; reduces working capital and liquidity; slows growth/expansion; excessive drawings can lead to collapse of the business.
(b)(i) Accrued expenses: expenses owed at the year end – shown as a current liability (and added to the expense in profit and loss).
(ii) Prepaid expenses: expenses paid in advance for the next period – shown as a current asset.
(iii) Accrued income: income earned but not yet received – shown as a current asset.
Effects on capital and cash, then current assets vs current liabilities.