Accruals and prepayments

nodgers1

HEllo

i have my FRA CBE in 2 weeks and am still struggling sometimes with this topic. i was working on december 2009 past paper last night, and i am confused on question 1.4

it asks you to prepare the rent account, clearly showing the rent for the year ending 30th september 2009

I get the bank figure of £8000 for rent, but in the question is says the bank figure includes a payment of £1,350 for the period 1t september to 30th november 2009

in the answer, the prepayment equals £900 (1,350/3*2)= £900

i cannot for the life of me figure out how they have worked out the figure to be £900

anyone pls help?

thank you

crispy

Hi,

The payment from the bank covers a 3 month period (Sept, Oct, Nov).

The accounts you are preparing for are year ending 30th Sept.

As at the Year End, date you have therefore paid in advance (ie:a prepayment) for October and November.

The prepayment is then calcuated as £ 1,350 / 3 (£ 450 per month) * 2 = £ 900

The rent account would look something like:

Bank Payments: 8,000
Prepayment at Year End: (900)
Charge for Year : 7,100

Bowdent

Hi mate

Hopefully this will help.

What you are doing, is accounting for all the transactions to the end of the accounting period, which in this case is 30th of September 2009.

Now, what they are saying, is that of £8,000 of rent that has been physically paid from the bank account, part of it relates to AFTER 30th of September 2009. In essence the company pays for rent every three months.

In the question they say that one of the payments made was for £1,350 for the period 1st of September 2009 to 30th November 2009. Therefore, you need to take out an element of it, as it relates to a future accounting period. This is done via a prepayment.

They have paid £1,350 for three months rent, but we only want the part that relates to september included in our accounts. The other two months, October and November (which are included in the £1,350) are the prepaid element.
So, we take £1,350 divide it by three (which in essence calculates the monthly rent charge). We then say that two months relate to the next accounting period, so we multiply by 2, which gives you the prepayment of £900.

A bit wordy in my answer I know, but hope it helps. Please leave feedback on if it helped, or if you need some more assistance.
Thanks

nodgers1

Hi Bowdent and crispy

thanks alot! i think that makes much more sense now, what i couldnt understand before was after dividing the figure by 3, they had multiplied it by 2, but now from yr explainations it makes much more sense.

thank you very much

Bowdent

No problem.