Question

How will you deal with the following items in Accounting Equation:
1. Interest on Capital
2.Interest on Drawings
3.Accrued Income
4. Unearned Income ₹
5.Prepaid Expenses
6.Outstanding Expenses

Answer 1

(a) Outstanding Expenses: Such expenses are incurred in the present accounting period but are not paid. As expense is generated during accounting period it makes perfect sense to charge it against revenue earned to arrive at true profit or loss. These are liabilities and need to be paid.

(b) Prepaid Expenses: Those type of expenses in which the associated benefit has not been materialized, but the payment is already done in advance are known as prepaid expenses.

(c) Income received in advance: The income is received in the present accounting period and the benefits will be realised in the upcoming accounting period, such income is called income received in advance.

(d) Accrued Income: Income that is earned in the accounting period, but yet to be received by end of accounting period is known as accrued income. It is due to be received in the future accounting periods. It is shown on asset side of balance sheet.