Reference no: EM132504665

Accruals & Prepayments

Masha and the Bear Inc. had several expenses during 2018. Some of them were the below:

Expense Account US$

Electricity 6,500

Water 1,700

Salaries 180,000

It is now 15 February, and the accountant has to make some final entries before the financial records of 2018 are closed. She noted the below:

1. The audit of 2018 will start in the beginning of March. For the past two years the audit fee has been the same and it is expected to be the same for 2018 also. This has amounted to $5,000.

2. Electricity paid in 2018 did not include December 2018 (it was paid in January 2019) and the portion for this month was $500.

3. The water expense paid in January 2019 included also December 2018 which amounted to $300.

4. During the Christmas holidays, an employee requested an advance against his salary, i.e. to receive half of January 2019 salary in December. This amount was $1,500.

Required:

Question a. Explain what are accruals and give an example.

Question b. Explain what are prepayments and give an example.

Question c. Prepare the below accounts (taking also into account the notes) for 2018 indicating the amounts that should be reported in the Profit and Loss account, and Balance Sheet Account at the end of the year. You are required to present also extracts of the Profit and Loss account, and Balance Sheet Account for 2018.

1. Electricity
2. Water
3. Salaries
4. Audit Fees