Accruals and Prepayments in WAEC Financial Accounting: A Step-by-Step Method

Accruals and prepayments turn up every year in WAEC Financial Accounting. They appear as objective questions and as adjustments inside the income statement and statement of financial position. They aren't difficult, but they punish one habit: copying the trial balance figure straight into the income statement. This guide shows the method that works every time.

The one idea behind both

The income statement must show the expense that belongs to the accounting year, whatever was actually paid in that year. (This is the accruals, or matching, concept.)

• Accrued expense (expense owing): the year used a service that hasn't been paid for yet. Add it to the expense, and show it as a current liability.
• Prepaid expense (paid in advance): some of the cash paid covers the next year. Deduct it from the expense, and show it as a current asset.

Method: draw the year, then count the months

For every adjustment question:

1. Write down the accounting year, for example 1 January to 31 December.
2. Work out the monthly cost (total paid ÷ number of months it covers).
3. Count the months of the accounting year that this cost belongs to.
4. Expense for the year = monthly cost × months in the year.
5. Compare with what was paid for this year. The difference is the accrual or the prepayment.

Worked example 1: a prepayment

A business with a year ending 31 December 2025 paid ₦480,000 rent on 1 October 2025, covering 12 months from 1 October 2025.

• Monthly rent = ₦480,000 ÷ 12 = ₦40,000.
• Months of this year covered: October, November, December = 3 months.
• Rent expense for the year = ₦40,000 × 3 = ₦120,000.
• Prepaid rent (January to September 2026) = ₦40,000 × 9 = ₦360,000: a current asset.

The trial balance shows ₦480,000, but the income statement shows only ₦120,000.

Worked example 2: an accrual

Electricity for the year ending 31 December 2025 costs ₦5,000 a month. By 31 December, bills totalling ₦50,000 had been paid (January to October).

• Expense for the year = ₦5,000 × 12 = ₦60,000.
• Paid = ₦50,000, so ₦10,000 is owing for November and December.
• Income statement: electricity ₦60,000. Statement of financial position: accrued electricity ₦10,000 (current liability).

A WAEC-style question, step by step

A firm's year ends on 30 June. Advertising of ₦36,000 was paid by cheque, covering 12 months ending 31 March. How much advertising is owing for the year ended 30 June?

1. The payment covers April (last year) to March (this year): ₦36,000 ÷ 12 = ₦3,000 a month.
2. The accounting year runs July to June.
3. Months of this year covered by the payment: July to March = 9 months, worth ₦27,000.
4. Months of this year not paid for: April, May, June = 3 months.
5. Amount owing = 3 × ₦3,000 = ₦9,000, and the full-year expense is ₦36,000.

The trap: students who see "12 months" and "₦36,000" often answer "nothing owing". But the payment covers the wrong 12 months: three of them fall in the previous year.

Quick check

• Expense owing (accrual): add to the expense; show as a current liability.
• Expense paid in advance (prepayment): deduct from the expense; show as a current asset.
• Income received in advance: deduct from the income; show as a current liability.
• Income still receivable: add to the income; show as a current asset.

Notice the mirror image: income received in advance is a liability (you owe the service), while an expense paid in advance is an asset.

Practise it

Accounting marks come from repetition. Practise WAEC Financial Accounting free on AceWAEC, and read the full explanation for every question you miss.