Prepayments and accruals

Abbie28

Looking at the online cbe fra i always always hesitate on prepayments and accruals i seem to get balances all round the wrong way.... is there any way i can remember what way round they go?

Monsoon

Think about it logically. Prepayments and accruals are to do with expenses. Expenses are always debits.

Prepayments are things you have prepaid - the clue is in the name, these are the expenses that you have already posted to the P&L, but are for a future period. Therefore you have to leave them out of the P&L for the current period. Therefore to do that, you have to do the opposite to getting them into the P&L - do it's a credit. Therefore the debit is to the prepayments account.

Accruals are things you know you need to pay, but that you haven't had the invoice for yet, so the expense hasn't been posted to the P&L. Therefore you have to bring it in by debiting the expense account, therefore the credit is to the accruals account.

If you can get your head round one of them (prepayments as I think the name is more logical) then you can use that to work out the other one.

Hope that helps - I don't have any clever acronyms or anything, sorry!

clegganator

Another way to think about accurals is that they are liabilities (though they haven't quite been raised) so therefore you credit the accural account and debit whatever account it is.

For instance, we put our fee in accounts as a accural because they inccur the expense as part of that year, but they haven't paid it...

Hope that helps. I too don't have any nifty ways to remember it...

gguest

a easier way than that is if u look at the two words an accrual has a cr in it so its a credit and a prepayment doesnt so it is the debit thats the way i learnt it without having to remember all the tech ways it was simple quick and easy

Abbie28

do you understand why they do 2/3 on either one accruals or the prepayment?

gguest

it depends on the question if the question says yr end march and the gas bill has been paid up until may for that quater a quater is 3 months months so divide total by 3 and x2 that will give you your pre payment i hope that it what u wanted. so if it says a quater u need to remember that that is 3 months

Abbie28

thank you it is like every time i come to either a prepayment or accruals question in a exam my mind goes on hold and i cant work it out. i just dont understand why?