Prepayments and accruals

OliverTheEighth
OliverTheEighth Just JoinedRegistered Posts: 4
Can anyone please clarify this question which is in FRA practice computer exam:
info given:
Prepayment for rent £750
Accrual for admin expenses £200

In the model answer for rent account, the balance b.d. is £750 dr side.
I would have thought it should be cr - surely a prepayment is an asset,
so I would have thought the entries would be:-
Prepayments dr
Rent cr

The model answer shows rent for year as £6000, wheareas I calculated it as
£6500.

Note: Similar problem with the accrual question.

Thanks.

Comments

  • PGM
    PGM Font Of All Knowledge Registered Posts: 1,954
    If the b/f amount is on the debit side, then it is on the assets side (current asset)
  • sdv
    sdv Experienced Mentor Registered Posts: 585
    Can anyone please clarify this question which is in FRA practice computer exam:
    info given:
    Prepayment for rent £750
    Accrual for admin expenses £200

    In the model answer for rent account, the balance b.d. is £750 dr side.
    I would have thought it should be cr - surely a prepayment is an asset,
    so I would have thought the entries would be:-
    Prepayments dr
    Rent cr

    Yes you are abosolutely right; DEBIT prepayment account and CREDIT rent account.

    But when?

    At the end of the year!

    However,

    When you start the new year....... you have to reverse your prepayment and accruals accounts.

    therefore DEBIT RENT account with £750 and CREDIT PREPAYMENT account.

    This will clear the prepayment account and leave DEBIT (asset) balance in the EXPENSE (Rent) account. AND this is correct because last year's prepayment was this year's rent expense (DEBIT balance).

    Therefore your model answer is correct.
  • Shell B
    Shell B Feels At Home Registered Posts: 95
    Hello

    Not sure if this will help but this is how i remember prepayments and accruals.

    If you have an opening balance for a prepayment this will always go on the debit side as its an asset.
    Your bank will be a debit as the money is going out of your bank and has to go in somewhere.
    then your balance carried down should be a credit.

    so to find the total rent for the year, balance the account then take your balance carried down off and there is you rent.

    so its opening balance + bank - closing balance = rent

    accruals is the opposite

    Bank + closing balance - opening balance = what ever your looking for

    Hope i have not confused you, it took me a bit of practise to get it into my head.

    Shell B
  • PGM
    PGM Font Of All Knowledge Registered Posts: 1,954
    sdv wrote: »
    Therefore your model answer is correct.

    Very well explained SDV!
  • OliverTheEighth
    OliverTheEighth Just Joined Registered Posts: 4
    Thanks to all for helping - actually passed simulation,
    despite getting that question wrong.
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