week 3 accruals and prepayments. aims to introduce the accruals concept and its effects on the...
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Aims To introduce the accruals concept and its effects on the financial statements. Objectives At the end of these sessions, you should be able to: 1. Describe the purpose of the accruals concept and how it affects the financial statements. 2. Make the necessary adjustments to account for any year end accruals and prepayments in both the main ledger and the final accounts. 3. Complete the ETB, making the necessary adjustments for any accruals and prepayments and produce the final accounts.
Accruals & Prepayments
Accruals
DefinitionAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts.
Paid Car Insurance on 1April 20X0 for 12 months
20X0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
20X1
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
20X2
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Energy Costs
31/12/X5 Balance b/d 675.02
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Energy Costs
31/12/X5 Balance b/d 675.02 31/12/X5 57.85
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Energy Costs
31/12/X5 Balance b/d 675.02 31/12/X5 57.85
Accruals
31/12/X5 Energy Costs 57.85
To P & L Account as an EXPENSE
To Balance sheet as a LIABILITY
AccrualsSummary of posting:
Debit the expense accountto increase the expense to reflect the fact that an expense has been incurred; and
Credit an accruals account to reflect the fact that there is a liability for the expense.
Your Journal would be: Dr Cr
Dr Energy Costs 57.85Cr Accruals 57.85
‘Being energy costs not invoiced for at year end’
Accruals exampleJohn Smith’s business has a year end of 31 December 20X8. During the year John made payments for the rent of a shop as follows £ 31 March (for quarter to 31 March 20X8) 3,000 29 June (for quarter to 30 June 20X8) 3,000 2 October (for quarter to 30 September 20X8) 3,000
The final payment due on 31 December 20X8 for the quarter to that date was not paid until 2 January 20X9. Required Prepare ledger accounts for shop rent for the year ended 31 December 20X8.
Accruals solution
Shop Rent
20X8 £ 20X8 £
31/3 Cash 3,000
29/6 Cash 3,000
2/10 Cash 3,000
31/12 Accrual 3,000
Accruals solution
Shop Rent
20X8 £ 20X8 £
31/3 Cash 3,000
29/6 Cash 3,000
2/10 Cash 3,000
31/12 Accrual 3,000
12,000 12,000
Accruals solution
Shop Rent
20X8 £ 20X8 £
31/3 Cash 3,000
29/6 Cash 3,000
2/10 Cash 3,000
31/12 Accrual 3,000 31/12 P & L A/C 12,000
12,000 12,000
Accruals solution
Shop Rent
20X8 £ 20X8 £
31/3 Cash 3,000
29/6 Cash 3,000
2/10 Cash 3,000
31/12 Accrual 3,000 31/12 P & L A/C 12,000
12,000 12,000
1/1 Accrual b/d 3,000
Practice Question 1 - Samina
Telephone
20X8 £ 20X8 £
31 Mar Cash 845
31 Mar Accrual 170 31 Mar P & L A/C 1015
1015 1015
Practice Question 1 - Samina
Telephone
20X8 £ 20X8 £
31 Mar Cash 845
31 Mar Accrual 170 31 Mar P & L A/C 1015
1015 1015
1Apr Accrual b/d 170
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Electricity Bills are received quarterly
Cost to end October £5000
(Year end 31/12/2014)
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Bill for £1800 covering quarter ending January 2015 is received in February ‘15
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Bill for £1800 covering quarter ending January 2015 is received in February ‘15
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
Monthly share of £1800 ÷ 3 x 2
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
2014 share of £1800 ÷ 3 x 2
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
AccrualsAn expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts
2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500 600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
is accrued
Accruals2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500 600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
is accrued
Energy Costs
31/12 Bank 5000
Accruals
Accruals2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500 600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
is accrued
Electricity Costs
31/12 Bank 5,000 31/12 Accrual 1,200
Accruals
Accruals2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500 600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
is accrued
Electricity Costs
31/12 Bank 5,000 31/12 Accrual 1,200
Accruals
31/12 Electricity 1,200
Accruals2014
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
500 500 500 500 500 500 500 500 500 500 600 600
2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
is accrued
Electricity Costs
31/12 Bank 5,000 31/12 Accrual 1,200 31/12 To SOCI 6200 6,200 6,200
Accruals
31/12 Electricity 1,200
Accruals2015Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
600
£1200 electricity cost
accrued is now the b/d
balance
Electricity Costs
1/1 Bal b/d 1,200
Accruals
1/12 Electricity 1,200 31/12 Electricity 1,200
Tia’s Tombola – Year end June 20X8
Insurance Costs
On 1st March 20X7 paid
£1500 for 12 months
Accruals
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Tia’s Tombola – Year end June 20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Electricity Costs
Accruals
Tia’s Tombola – Year end June 20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Electricity Costs
1/7 Bal b/d 320
Accruals
Tia’s Tombola – Year end June 20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Electricity Costs
30/6 Bank 13401/7 Bal b/d 320
Accruals
Tia’s Tombola – Year end June 20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Electricity Costs
30/6 Bank 13401/7 Bal b/d 32030/6 Acc (May) 180 30/6 Accr (June) 150
Accruals
Tia’s Tombola – Year end June 20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Electricity Costs
30/6 Bank 13401/7 Bal b/d 32030/6 Acc (May) 180 30/6 Accr (June) 150
Accruals
30/6 Electric Accrued 330
Tia’s Tombola – Year end June 20X8
Insurance Costs
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Tia’s Tombola – Year end June 20X8
Insurance Costs
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 1000
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 10001 Mar Bank 1800
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 150
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 10001 Mar Bank 1800
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 150
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 10001 Mar Bank 1800
Prepayment
20X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 150
20X9
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 100030/6 Prepaid 12001 Mar Bank 1800
Prepayment
30/6 Insurance 1200
20X7
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 15020X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 100030June Prepaid 12001 Mar Bank 1800 2800 2800
Prepayment
30/6 Insurance 1200
20X7
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 15020X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
Tia’s Tombola – Year end June 20X8
Insurance Costs
1 July Bal b/f 100030 June Prepaid 12001 Mar Bank 1800 Xfer to IS 1600 2800 2800
Prepayment
30/6 Insurance 1200
20X7
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
125 125 125 125 125 125 125 125 150 150 150 15020X8
July Aug Sep Oct Nov Dec Jan Feb Mar Apr May June
150 150 150 150 150 150 150 150
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