AP1 Accruals and Prepayments, Can anyone Help ??

Omer AYDINLI

Hi everyone,
I have exam of AP1 end of this month but still very confused about accruals and prepayments. How an expense a/c can give a cr balance b/d ??

Balances as at 01.10.05
Prepayment of commission income 175
Accrual of stationary 134
Accrual of rental income 250

Bank summary shows receipts of commission income of 496. Commission of63 is still due for sept.06 at the year end.
Q1) Prepare the commission income a/c for the year ended 30 sept. 06 and show transfer to I.S. ?
Answer: Dr I.S. 734
Cr b/d 175
Cr Bank 496
Cr c/d 63

-How c/d 63 on the credit side???

Bank summary shows payments for stationary of 798. In sept.2006 48 was paid for items used in Oct.2006.
Q2) Prepare stationary a/c for the year ended 30 sept.06 and show the transfer to the I.S. ?
Answer: Dr Bank 798
Cr b/d 175
Cr c/d 48
Cr I.S. 616

-Stationary is an expense a/c and why and how b/d 175 is on the cr side??

Bank summary shows receipt of rental income of 5000. Included in this figure 270 for the quarter ended 30 Oct.06.
Q3) Prepare rental income a/c ?
Answer: Dr b/d 250
Dr c/d 90
Dr I.S. 4660
Cr Bank 5000
- Again, rental income a/c is an income account and it should give cr balance to following year but how on that sample it gives dr b/d ??

Can anyone help please??

KaySarah

Omer AYDINLI wrote: »

Hi everyone,
I have exam of AP1 end of this month but still very confused about accruals and prepayments. How an expense a/c can give a cr balance b/d ??

Can anyone help please??

MarkT is an ace on this - but ..
Your 63 Accrual is a Credit Balance because it is INCOME, not expense acc.
your 175 Stationery is an expense Prepayment, so is a Credit.

If you go to AAT Greenlight - it is explained really clearly. Accrual is in Dr only when it's an expense, it works the opposite way for income.

kewko

best way to think of it is a prepayment expense is an asset, accrued expense is a liability and an accrued income is an asset. then think wotside does an asset go on.

Hope it helps.

MarkT

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

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 accrued 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

crispy

Simple example of rent receivable if of any use:-

Year End is 31/12 - you raise Sales Invoice in Dec for £200 covering both Dec and Jan, journal at Year End would be:

Dr Rent Income £ 100
Cr Accruals / Deferred Income £ 100

Year End is 31/12 - rent is £100pm, but you have yet to raise an invoice for Dec at Year End. Journal would be: -

Dr Prepayments / Accrued Income £ 100
Cr Rent Income £ 100

These get more confusing when you have prepayments accruals to bring forward

Omer AYDINLI

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 [/QUOTE]

Thanks a lot for your help
But my main problem is I am so confused about bal. b/d `s.
How a b/d of an accrued expense a/c can be on cr side? or how b/d of an accrual on dr side in the income a/c. I do not have any problems abouts accruals and p.p`s on e.t.b.
Just trying to understand its logic.

Thanks again.

MarkT

Omer AYDINLI wrote: »

Thanks a lot for your help
But my main problem is I am so confused about bal. b/d `s.
How a b/d of an accrued expense a/c can be on cr side? or how b/d of an accrual on dr side in the income a/c. I do not have any problems abouts accruals and p.p`s on e.t.b.
Just trying to understand its logic.

Thanks again.

Hi Omar,

Trust me this one - it took me two years to get my head around this and I went through 3 teachers until it sunk in

I think the way we have to understand it is that if we look at the trial balance and we have our expenses as debits and income as credits.

An accrued expense will be a credit as such as it has not yet been paid but, in going along with the accruals concepts, we must make an allowance for it or we could effectively be saying that last year, we had made a profit of £100000, because our landlord who usually bill us in advance for rent did not give us the invoice in time and so, as it has not been on our ledger, we do not owe it. Its not right is it? We know that we usually pay £25000 a quarter so, we would make this accrual which would be a credit (liability) on our sfp

Does this make any sense? If there is someone else who could help here then please amend what I've explained - its not the easiest of concepts I agree :001_smile:

Omer AYDINLI

Hello Mark,


Balances as at: 1 April 20X0

Accrual for administration expenses 790
Prepayment for selling expenses 375

1) The bank summary for the year shows payments for administration expenses of £6190. Included in this figure is £1800 for the quarter ended 31 May 20X1.
Prepare the administration expenses account for the year ended 31 March 20X1 and close it off by showing the transfer to the profit and loss account
Answer;
Administration expenses

£ £
Bank 6190 Balance b/d 790
Balance c/d 1200
Profit and loss account 4200
6190 6190


2) The bank summary for the year shows payments for selling expenses of £7900. In April 20X1, £825 was paid for selling expenses incurred in March 20X1.
Prepare the selling expenses account for the year ended 31 March 20X1 and close it off by showing the transfer to the profit and loss account. Include dates.

Answer:
Selling expenses

£ £
1/4 Bal b/d 375 31/3 Profit and loss account 9100
31/3 Bank 7900
31/3 Bal c/d 825
9100 9100

In question one, what is the logic for that c/d 1200 and P&L 4200 on credit side?
In question two, what is the logic that c/d was on dr side and P&L was on cr side?

Thank you very much indeed.

j1994

Can someone help explain task 3 aat sample assesment 1 2013?