So you’re learning accruals and prepayments, and the tables in the
book mean absolutely nothing to you!
I’ve been there, and I know when we were taught AAT Level 3 most
of the students in my class just couldn’t get there head around the reason for
an accrual and why they had to do it to pass AP2!
So this is my in a nut shell blog on how to think of them and how to
work them out.
Accruals
An accrual is an expense transaction for a service we have not
received an invoice for.
For example Electricity, Gas, Insurance, telephone bills are
mostly invoiced quarterly. Therefore we may be using a service and be billed
for it at a future date. To save us being hit for a lump sum cost, and as
accounts are usually updated on an accruals basis we will work out the expected
costs per month and recognise that by posting an accrual
The transaction is an expense, and as in my previous blog all
expenses are debits. Therefore we would
debit the expenses code in the P and L, and credit the accruals code in the
balance sheet. That completes our double entry.
In this example I will use an electric bill for 3 months £300.00,
£100 Per Month.
DR Expenses
£100
CR Accruals £100
In the example above I have accrued for 1 month, but if next month
we have still not received an invoice I would release this accrual and accrue
for two months, and so on, until I receive an invoice. Once the invoice is
received you need to release your accrual by posting the opposite journal
DR. Accruals
£10
CR. Expenses
£100
Prepayments
Prepayments however are expenses we have already
received an invoice for, but the invoice has a future period on it. Using the
same example above if today’s date was 31.03.15 and I had received an electric
bill dated 01.03.15 to the 30.06.15 I would divide the bill by 3 months (this
can also be split by days depending on your company policy) and post 1 months’
worth to the expense code and 2 months’ worth to prepayments
DR Expenses £100
DR Prepayments £200
CR Trade Creditors £300
It really is as simple as that. If you can remember
that all expenses are debits then to accrue is to DEBIT and to Prepay is to
push that debit to a future period so CREDIT.
Hope this helps with any accrual and prepayments
issues
If there are any other examples you need let me
know
Nicola Cima Dip MA
Facebook: So you wanna be an accountant?
https://twitter.com/AccountantLive
www,wannabeanaccountant.co.uk
Email: donnellynicola7@gmail.com
