MWAUGH1983 wrote: »
I am looking at question 9 in this book for accruals and expenses. Can someone explain where the figures come from balance c/d and profi and loss?
Cheers in advance!
sdv wrote: »
There are two expense accounts in that question; Admin expense and Selling expense
Admin expense has a prepayment of £1800 at the end of the year; and
selling expense has an accrual of £ 900 at the end of the year.
We shall deal with Admin expense
Normally the double entry will be Debit Prepayment a/c £900 and Credit Admin expense £900. Then close the Admin and transfer the balance in the admin account to P&L a/c.
In the new accounting period there will be zero balance in the Admin account. On the very first day of the new period we need to reverse the Prepayment journals; thus
Debit Admin expense with £900 and Credit Prepayment account with £900.
The prepayment account is now cleared and closed and the The admin account now correctly shows that £900 of the expense that belongs in this period but paid in the last period showing a Debit balance of £900 in the admin account.
Now the Kplan book (AAT exam method) does not use the prepayment account but instead uses a shorcut and the prepayment is carried down with the balance of the account transfered to the P&L account.
So in the new year you do dot have to reverse the prepapyment juournal because the perpaid expense was correctly brought down on the debit side.
Same with the accruals but on the oppsite side.
I hope this explanation helps