Accruals/opening closing balances

sscors

Hello

so far understood accruals concept until I came to opening and closing balances. Not sure why when an accrual is accounted for in the expense account that the accrual brought down is included as the opening balance on the expense account at the start of the following year. Puzzled as to why accrual is carried over to next year?

PGM

sscors wrote: »

Puzzled as to why accrual is carried over to next year?

In theory the accrual is carried forward until the cost arrives.

ie you may accrue for elec cost in 2010, then reverse the accrual in 2011 once the cost you had been accruing for is posted onto the ledgers.

Although most companies do their accruals at the end of each month, carry them forward and reverse them on the first day of the following month, and repeat as necessary at the end of each month.

sscors

Surely accruals will get cancelled when they are actually paid the follwoing year? So why carry them over? Confused!

PGM

sscors wrote: »

Surely accruals will get cancelled when they are actually paid the follwoing year? So why carry them over? Confused!

I carry them forward so they remain in the accounts, we prepare monthly management accounts.

Audit is a good example, we accrue £1000 per month, c/f £12k at the end of the year and that amount is gradually used over several months as audit invoices come in.

MarkT

sscors wrote: »

Surely accruals will get cancelled when they are actually paid the follwoing year? So why carry them over? Confused!

Someone please correct me if I am wrong here, but I do believe that the carrying of the accruals over would be consistent with the prudence concept of accounting. As with PGM's comment with the audit scenario. If you didn't accrue for expected prepayments and expenses, you would be over-stating or understating your profits each year

crispy

The use of prepayments/accruals is connected the the accruals concept - the matching of relevant expenses to income for a period and is bedrock to the preparation of financial accounts. Prudence concept is more using a cautious approach when completing the accounts - eg. it may be prudent to include a 5% provision for doubtful debts, or it may be prudent to reduce or write off a item of inventory etc.

Hope this helps.

sscors

Thanks everyone

Yazi

e.g.
As at the end of Jan you have to Accrue for expense which has not been invoiced for before the end of the month. So you debit the expense and credit Accruals.
This will need to be reversed as and when you receive the invoice for the expense.
(otherwise the cost will be showing twice as an expense) So you take the amount out
(credit) the expense account and debit the accruals account.
In the learny books this is shown as a balance brought down and will be a credit in the expense account at the start of the next period. It is just a reversal of the accrual.

Tried to do T accounts but they went all odd on the preview.....

So at 31/01/12 you Debit Expense with say £100 and credit Accruals.
As at 01/02/12 you Debit Accruals with the £100 and credit the Expense.

This removes the amount from Accruals and takes the cost back out of expenses.