Advance expenses and accrued income
Money management is an important part of our daily life, it is fundamental in achieving goals and achieving financial well-being. One of the most important aspects of money management is understanding the provided expenses and accrued income, and the difference between them. In this article, we will discuss the concepts associated with expenses and income and how to deal with them.
Financial management is considered one of the most important departments in any commercial organization, it is concerned with the management of money and funds, it is based on the calculation of expenses provided and accrued income. In this article we will talk about the provided expenses, accrued income and the difference between them, as well as an explanation of the types of expenses and income and an illustrative example of each type.
It is necessary for any person who owns his own business or works as an accountant in a company to familiarize himself with the concept of Provided expenses and accrued income. These crucial terms are an integral part of accounting, help to understand the financial condition of the company or enterprise. In this article, we will take an overview of what are provided expenses and accrued income, explain the difference between them.
Provided expenses and accrued income speak about payments and financial income that were recorded in the books of accounts. Advance expenses refer to payments that must be made in advance on purchased items or services that have not yet been used. This includes wages, rent, prepaid bills and other expenses.
Accrued expenses represent expenses for services related to the current year but not paid in the current year and are reflected in the liabilities side of the statement of financial position (budget).
Advance expenses and accrued income are two of the most important accounting concepts that any financial manager should know well. These concepts help to determine the health and stability of the business and help to effectively manage resources. But before talking about the difference between provided expenses and accrued income, let's talk about the concept of each of them.
What are the expenses provided ?
Advance expenses are payments that must be made in advance for services or materials that have not yet been used that the company needs. The provided expenses include, for example, salaries, wages, rental costs, production costs, supplies necessary for operation, including consumables, sanitary ware and others.. The submitted expenses must be recorded in the books of accounts as an expense
An example of Provided expenses
The submitted expense "does not appear in the income statement" appears in the current assets because it is the right of the company to third parties.
Example: EGP 120,000 rent was paid for the current year 2022 and next year until the end of 2023
The part related to the current year is called general expenses wages and is shown in the income statement
Wages are recorded as public expenses every month for a year 60,000 thousand EGP the value of the monthly rent is recorded as follows:
5000 EGP of H / general expenses "Rents ".
5000 EGP to H / the bank or Treasury.
The part that concerns the following year is called an advance expense and is shown by current assets in the statement of financial position
60000 EGP of H / advance payment " Rents "
60000 EGP to H / bank or Treasury
Types of expenses provided
Expenses can be broadly divided into operating expenses, general and administrative expenses.
Examples of operating expenses include:
1-expenses of raw materials necessary for production.
2-wages and salaries for the operational process.
3 - expenses of the number and tools necessary for production.
Examples of general and administrative expenses include:
1-wages, salaries and the like for employees in exchange for the work they do.
2-rental expenses, which represent the rent of the administrative headquarters or shops.
The difference between advance expenses and accrued expenses?
Advance expenses:
- It includes payments made in advance for the purchase of goods, services or to pay other costs.
- They are recorded in the accounts payable of the company.
- They are consumed immediately after payment and are not postponed.
Accrued expenses:
- Includes payments that have been postponed and have not been paid yet.
- They represent the obligations that the company must repay in the future.
- They are recorded in the accounts receivable of the company.
- The depreciation of these expenses is postponed to the period when payment on them is due.
An example of accrued expenses
Q: there are electricity and water expenses of EGP 8000 that have not been paid this year
Due on 31/12/2023
4000 of H / general expenses-electricity and water
4000 to H / accrued expenses-electricity and water
When the payment is made in the coming year 2024, it will be
4000 of H / accrued expenses-electricity and water
4000 to H / bank or Treasury
What is the accrued income:
Accrued revenue is considered income that is collected from customers but has not yet been collected. These revenues are also considered temporary revenues because they will be collected later. For example, if a company provides a service to customers and its fees have not yet been paid, this amount will be classified as accrued income and will be collected in the coming months.
While the presented revenue is an unearned revenue until the date of preparation of the final accounts for the year, it appears next to the budget obligations, for example, amounts received for a service or a good that was not provided to the client until that date, and when presented to the client, it becomes accrued revenue.
The difference between provided income and accrued income?
Income provided:
- It includes amounts that were charged in advance before the provision of services or the provision of products.
- It is a source of temporary financing for the company.
- They are recorded in the accounts receivable of the company.
- The company is obliged to provide services or provide products later and on the basis of the agreement concluded with the customers.
Accrued income:
- It includes the amounts that you expect to receive in the future after the provision of services or the provision of products.
- Represent the rights accrued to the company from its sales or concluded contracts.
- They are recorded in the accounts payable of the company.
- Customers must pay the amounts due in accordance with the terms and conditions agreed with the company.
An example of provided revenue
On 01/01/2022, the company received an amount of EGP 30,000 for providing a car maintenance service in advance, which has not yet been implemented
On 31/12/2022, it was found that the company provided 50% of this maintenance service
And on 03/01/2023 the rest of the maintenance service was carried out
Registration upon receipt of the amount on 01/01/2022
15000 H / cash or bank
15000 to H/ revenue provided
Registration as of 31/12/2022 inventory adjustments
15000 of H/ revenue provided
15000 to H / revenue
Registration on 03/01/2023 upon completion of the rest of the maintenance work
15000 of H/ revenue provided
15000 to H / revenue
An example of accrued income:
Q: the company has provided maintenance services and has not received any amount yet, and the outstanding consideration was 25,000
Settlement is pending on 31/12/2022
25000 H/ accrued income
25000 to H / revenue
The company collected the amount in cash on 3/2023
25000 H/ cash or bank
25000 to H / accrued income
Difference between advance expenses and accrued income:
The presented expenses differ from the accrued income in some important points, Advance expenses are prepaid and not accrued amounts, while accrued revenues are amounts that are due to be collected from customers and have not yet been collected. To clarify these nuances, they can be summarized in the following points:
1-the expenses Provided have been paid in advance and are not due, while the accrued income is due for collection and has not yet been collected.
2-the presented expenses represent a temporary cost, while the accrued income represents a temporary income.
3-the presented expenses are classified as expenses in the accounting books, while the accrued income is classified as income.
How to calculate the provided expenses and accrued income?
Advance expenses can be calculated by tracking payments made in advance for services or products. Accrued revenue can be calculated by tracking business processes that will generate income in the future, such as invoices that have not yet been collected.
Difference between advance expenses and accrued income:
The presented expenses differ from the accrued income in some important points, the presented expenses are prepaid and not accrued amounts, while the accrued income are amounts that are due to collection from customers and have not yet been collected. To clarify these nuances, they can be summarized in the following points:
1-the expenses Provided have been paid in advance and are not due, while the accrued income is due for collection and has not yet been collected.
2-the presented expenses represent a temporary cost, while the accrued income represents a temporary income
3-the presented expenses are classified as expenses in the accounting books, while the accrued income is classified as income.
How to calculate the provided expenses and accrued income?
Advance expenses can be calculated by tracking payments made in advance for services or products. Accrued revenue can be calculated by tracking business processes that will generate income in the future, such as invoices that have not yet been collected.
What is the impact of advance expenses and accrued income on the company's financial accounts?
The expenses provided affect the total costs of the company, while the accrued income affects the total revenue of the company. Companies must properly manage the levels of expenses provided and accrued income to ensure the correctness of their financial calculations.
Can companies refund the expenses provided?
Companies can refund the provided expenses if they did not receive the ordered services or products, but they must agree with the seller or buyer.
Conclusion
Advance expenses and accrued income are considered basic terms in business management and finance. Provided expenses mean funds disbursed in advance for a service or good, while accrued income means funds collected later for a service or good provided. The importance of these two terms is in analyzing the financial situation of companies and organizations and making important financial decisions. Also, the provided expenses and accrued income can be calculated in different ways, it depends on the type of financial operation related to them.
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