Osborne Books & Question

Clarekaye

Its probably my brain,

Osborne books, Sole trader & partnership accounts tutorial.
Page 75/76 5.1 & 5.2

5.1 asks Accrued wages are shown as
a) an asset on sfp
b) debit on wages account
c) income on P&L
d) credit balance on wages account

I cannot get my head around how the answer is d....
I am thinking Accruals are a liability ie a credit but normally for expenses you debit for accruals?
have I just answered my own question?

uknitty

You sort of answered your own question.

An accrual must have both a debit and a credit entry. Accruals are a credit entry - so where does the corresponding debit entry go ?

Clarekaye

To wages/expenses?

uknitty

Yes

An accural is posted as a credit to the accuals account which shows as a liability in the SFP. It is posted as a debit to the relevant expense account - which increases the amount of expense in the SCI.

Clarekaye

Sorry I am so confused, I understand this bit, what I cannot get is how the answer in the book is d) Credit on wages account :-/

uknitty

Have you given the question here word for word as it is in the book ?

It is possible to have an accrued income - i.e you have recieved wages for work you have not yet done.
In that case the bookkeeping entries would be back to front.

Now your head hurts I bet Check the wording of the question and see if they have done a sneaky question about accrued income to try and trip you up.

ETA (I dont have this book so I don't know what the question says)

MarkT

It is only worded slightly different, but it is the same - 'accrued wages'

Clarekaye

So either way it should be on the debit side?
Yep my head hurts :001_unsure:

uknitty

The book keeping for an accrued expense is

Dr Wages

Cr Accruals


Here you are increasing the amout of money you have paid for wages in the year. The balance on the expense account gets bigger.

Accrued Income is money you have recieved that is actually due for the next period i.e

Cr Wages

Dr Accruals

You are reducing the balance on your wages account ( this would be money coming in to the business) because the money recieved does not all relate to the current period.

I doesn't really make sense to me that you would have "wages" incoming to a business though. I don't fully understand the question either - an accrued expense is definitely a debit to the expense account.

coojee

I think it's d) because when you bring forward the balance on the wages account next period it will be a credit balance ie when you reverse the accrual. Sneaky but I think that's it.

stevef

The question says d) a credit balance on the wages account.

In period 1 an accrual for wages will be a debit to wages and a credit to accruals, but the accrual has to be reversed out in period 2, so at the start of period 2 you

credit wages and debit accruals.

When closing period 1 down the total wages cost (including the accrual) is cleared to the SCI or P&L or Consolidated I&E or whatever its called these days, leaving a brought down balance which is a credit balance.

So d is correct.

Hope that helps.

uknitty

That is really sneaky ! I would have read the question to mean how would you record the accrual - not to mean how would accrued wages from the previous period show in the current years accounts.

stevef

Not that sneaky really, option d quite clearly says "a credit balance on the wages account", it does not say the posting of the accrual to the wages account. Like all exams, it is a matter of reading the question carefully.

uknitty

"In period 1 an accrual for wages will be a debit to wages and a credit to accruals, but the accrual has to be reversed out in period 2"

So it is shown as a debit in period 1 and a credit in period 2. I think if the question had read " how is a b/f accrual shown in the wages account" then it would have been clear.

The phrasing "how is it shown" isn't entirely clear as it would could be shown as either a debit or a credit depending on if you had finalised the period and reversed the accrual out yet or not.

Clarekaye

:ohmy: ohhh right
Thank you everyone x