AP1 - Accruals and Prepayments

Laura Gaynor

Hi All

I have my AP1 exam towards the end of February and I am struggling to get to grips with Accruals and Prepayments.

I have come back into level 3 after 3 years of being out of it, after 5 hour revison days on Sundays I am slowly getting back into the swing of things, but I just can't grasp this!

I don't understand everything, basically
How do I know that my accrual balances b/d are DR or CR and the same for a prepayment?

My tutor said some people like to use a mathematial accquastion
Example the answer to (a)
6190
- 790
- 1200
= 4200 P&L

Example for answer (b)
7900
+ 375
+ 825
= 9100

I like remembering it this way as I know I have the figures I need, but I need the understanding on when they are being added or taken away.

If they fall outside the year or when they fall inside the year, which way round are the added or taken away?

I also am totally confusing my debits and my credits inside these expenses accounts when I know I am making this harder than it should be! How do I know what side to put everything!

Can anybody give me any help and guidance and then what happens when it is an income, ie Commisson Received account.

Your help much appreciated

stuartander

"How do I know that my accrual balances b/d are DR or CR and the same for a prepayment"- Accruals (which is a current liability) will always have a credit balance on the balance sheet (so to increase you will CR and to decrease you will DR). Prepayments (which is an current asset) will always have a DR balance on the balance sheet, so to increase the balance you would DR and to decrease you would CR.

Accruals and prepayments arent expese accounts, Accruals = Current Liability, Prepayments = Current Assets.

MarkT

Here is a copy of a post in another thread here that I made recently:

There are 4 concepts you need to follow but they are placed on the debit and credit sides similarly.

On the adjustments column, an accrued rent expense is shown as:

DR Rent
CR Accrual

Here, the accrual gets transferred over to the SFP as it is a liability and, the TB rent is increased for the IS

For the same account, a prepayment of rent expense the exact opposite applies

DR Prepayment
CR Rent.... OF course!!!!

You then transfer the prepayment to DR on the SFP as this is an asset and reduce the TB rent account accordingly.

Here though, is where the bulk of a lot of peoples problems lie. And that is the type of account.

I'll use the rent again, but this time it is a form of income to the business (a rented out garage for example)

For an accrual of rental income we do the exact opposite of accrued rental expense

DR Accrual
CR Rental income

And for the prepayment of rental income We do the exact opposite of prepaid rental income

DR Rental income
CR Pre-payment

It is rare that you will get this kind of scenario, but this is how it is laid out. A prepayment and accrual on the SFP can be either a debit or a credit depending on the account in question

Hope this helps

Omer AYDINLI

Well shortly,
Remeber on your e.t.b, accruals will increase your expense so that dr at the adjustment column of etb which that relevant expense goes to P.L. and accruals account will be CR which goes to Current Liability in your B.S.
Prepayments decrease your expenses CR on adjustment column of etb and DR prepayment account which goes to Current Asset in B.S.

Laura Gaynor

Thanks for all your replies

I have just given my boss and the assistant this question to see if they could do it (see my attachment in original post) - They couldn't haha, though it made me feel better it still doesn't help with my understanding especially when it doesn't make sense to them.

Why is the balance b/d a credit and not a debit in the admin expenses?

Does anybody have any answers or help for when I am taking it away or adding it on for falling insdie or outside the period asked with my (a) and (b) calculations?

alem

Accruals and Prepayments

Regarding your question How do you know that your accrual balances b/d are DR or CR and the same for a prepayment. The answer for this is that if the account is Accrued Expenses, By it is very defination accrued expenses are expenses that are incurred but not paid. Hence on your book this is a liability and all liabilities have credit balance. If the account is prepaied expenses this means that money paid in advance of receiving the service or product. Hence on your account all prepaid expenses are assets account and the balance side of all assets are debt. So in conclusion Accrued expenses being a liability have credit balance and prepayment expenses being an assets have a debit balance.

I also need to tell you that there is also Accrued income and prepaid income. the balance will be just the opposit of accrued expenses and prepaid expenses respectevly.

I hope this will help.

Laura Gaynor wrote: »

Hi All

I have my AP1 exam towards the end of February and I am struggling to get to grips with Accruals and Prepayments.

I have come back into level 3 after 3 years of being out of it, after 5 hour revison days on Sundays I am slowly getting back into the swing of things, but I just can't grasp this!

I don't understand everything, basically
How do I know that my accrual balances b/d are DR or CR and the same for a prepayment?

My tutor said some people like to use a mathematial accquastion
Example the answer to (a)
6190
- 790
- 1200
= 4200 P&L

Example for answer (b)
7900
+ 375
+ 825
= 9100

I like remembering it this way as I know I have the figures I need, but I need the understanding on when they are being added or taken away.

If they fall outside the year or when they fall inside the year, which way round are the added or taken away?

I also am totally confusing my debits and my credits inside these expenses accounts when I know I am making this harder than it should be! How do I know what side to put everything!

Can anybody give me any help and guidance and then what happens when it is an income, ie Commisson Received account.

Your help much appreciated

j1994

Can someone help me with task3 aat sample assesment 1 2013 qiestion b?

j1994

"The vehicle running expenses account in part D will have a debit entry titled 'Bank' for £23,700 and lastly the amount to be transferred to P&L for vehicle running expenses will be £125 less than the figure carried down on D because 375 divded by 3 is £125 which is from the month of April which should not be included."
Why is it less than figure carried down?

CeeJaySix

We haven't got the full question here but on the face of it, it looks like the period end is 31 March.

A payment was made during the period to cover something to do with vehicles for the months of Feb-Apr - dr vehicle expenses, cr bank £375.

However, the April element of this falls into the next period. Therefore a prepayment would be made - dr prepayments, cr vehicle expenses by 1/3 x £375 = £125.

j1994

Owwww i see thankyou this really helped !