Accruals opening balances why a credit?

sscors

Hello

does anyone understand why previous year accruals brought down as opening balances on the following years accounts are on the CREDIT side and visa versa for openng balance prepayments?:confused1:

Thanks for your help

Diddy Mau

hi,

this will show on the credit side, as not yet paid. So once paid, you would Dr the accrual and Cr the bank account.
this will remove the accrual and balance

crispy

Hello,

It is because in the new period you are reversing the prepayment/accrual from the previous period. Eg

Y/e 31/12/11 create accrual for Accountancy

Dr Accountancy £ 1000
Cr Accruals £ 1000

New Year starts 1/1/12 - so reverse accrual

Dr Accruals £ 1000
Cr Accountancy £ 1000

At the next year end you would perform the same etc..

janwal

Hi

I tend to think of an Accrual as a liability (money owed), build up on the credit side and a prepayment as an Asset build uup on the debit.

Jan

sscors

janwal wrote: »

Hi

I tend to think of an Accrual as a liability (money owed), build up on the credit side and a prepayment as an Asset build uup on the debit.

Jan

Hi

I'm not sure I understand because the previous year the accrual was a liability but on the debit side? :confused1:

Richard

sscors wrote: »

Hi

I'm not sure I understand because the previous year the accrual was a liability but on the debit side? :confused1:

A liability wouldn't be a debit. The balance on accruals should always be a credit, and the prepayments account will always have a debit balance.

An accrual is used when there is essentially a cost missing from the profit and loss. So if you think of it in double entry terms, an expense will be a debit, do the opposite entry has to be a credit.

reader

Richard wrote: »

The balance on accruals should always be a credit

I disagree

For example, if you accrue a sales invoice for £1,000 raised on 01/01/2012 while preparing accounts ending 31/12/2011 you would:

DR Accruals (i.e. accrued income): £1,000
CR Sales: £1,000

Therefore accruals can have a debit balance (I know you are refering to accrued expenses but I couldn't help myself- big apologises).

(Then in the following year you would have to reverse the accrual, i.e. DR Sales for £1,000 and CR: Accrued income for £1,000; the accrual has to be reverse in order to prevent recording the same transaction twice, i.e. once in 2011 and once in 2012).

Richard

reader wrote: »

I disagree

For example, if you accrue a sales invoice for £1,000 raised on 01/01/2012 while preparing accounts ending 31/12/2011 you would:

DR Accruals (i.e. accrued income): £1,000
CR Sales: £1,000

Therefore accruals can have a debit balance (I know you are refering to accrued expenses but I couldn't help myself- big apologises).

(Then in the following year you would have to reverse the accrual, i.e. DR Sales for £1,000 and CR: Accrued income for £1,000; the accrual has to be reverse in order to prevent recording the same transaction twice, i.e. once in 2011 and once in 2012).

You are correct that accrued income is a debit balance, but this would be shown in debtors on the balance sheet, along with the prepayments. Therefore kept separate from accrued expenses. I wouldn't advise netting accrued income and expenses against each other, particularly in an exam.

reader

Richard wrote: »

I wouldn't advise netting accrued income and expenses against each other, particularly in an exam.

No one is saying they should be netted off: accrued income should be posted to accrued income, and accrued expense should be posted to accrued expense.

Richard wrote: »

The balance on accruals should always be a credit.

The main point is that the balance on accruals is not always a credit, for example, accrued income.

PGM

reader wrote: »

No one is saying they should be netted off: accrued income should be posted to accrued income, and accrued expense should be posted to accrued expense.

I accrued a bit of income, auditors picked it up as an error, saying I should have clasified it under debtors rather than accrued income, I hadn't thought about this before... It wasn't material so left it

reader

PGM wrote: »

I accrued a bit of income, auditors picked it up as an error, saying I should have clasified it under debtors rather than accrued income, I hadn't thought about this before... It wasn't material so left it

Interesting

I guess it depends on the date of the source document being accrued:

Pre-YE date: Gross amount should probably be shown as debtors

Post-YE date: Net amount should probably be shown as accrued income

crispy

Hello,

Just say you billed out a section of a warehouse for £1,000pm, your year end is 31/12 - and as at year end you had invoiced up-to 30/11 - the journal I would enter for year end would be:

Dr Prepayments & Accrued Income £ 1,000 (This would be entered under the 'Prepayments' Account)
Cr Rental Income £ 1,000

coojee

sscors wrote: »

Hi

I'm not sure I understand because the previous year the accrual was a liability but on the debit side? :confused1:

Think about what's happening in the expense account. Last year you wanted to increase the expense of, say, rent because you were accruing for rent due but not yet paid. To increase an expense account you DR it so the accrual last year was DR expense and CR accrual (this is the liability account) Now this year you pay for the rent (a DR to the expense account) but part or all of it related to last year (the accrual) so you need to decrease the expense account to take out that part of the bank payment that was accrued last year. To decrease an expense account you need to CR it so the journal is DR accruals (to reduce the liability) and CR expense (to reduce the expense).

sscors

Hurray I understand