Just looking through this chapter at the moment. Why is the advertising paid in advance for next year of £9000 removed from the advertising costs in the income statement, which in effect makes the net profit higher for the year as it is treated as a credit? As it is for next year, shouldnt it be ignored, or if not then just included by making profit less for the year by adding it in, and thus treating it as a debit? Also, why therefore is the provision (not yet paid) for admin expenses owing at the end of the year taken as a cost in this years income statement? I'm getting confused with the treatment of these two elements. Thanks in advance
Hi I think the key principle to keep in mind here is the accruals principle - ie expenses should be recognised in the time period they are incurred (not when they are actually paid). You're absolutely correct that the £9k paid in advance for advertising should not be included in the income statement for the current year. This is done by removing it from the £70k quoted for advertising costs this year (which are assumed to include the £9k). The same accruals principle explains the treatment of the admin costs as well. They were incurred in the year we're reporting on, so should reduce the profits in that year (even though they have not yet been paid at the end of the year). Hope this helps Lynn
