Accruals opening balances why a credit?

sscorssscors Feels At HomeRegistered Posts: 72
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

Comments

  • Diddy MauDiddy Mau Well-Known Registered Posts: 238
    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
  • crispycrispy Trusted Regular SouthamptonRegistered Posts: 452

    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..
  • janwaljanwal Experienced Mentor Registered Posts: 1,189
    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
  • sscorssscors Feels At Home Registered Posts: 72
    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:
  • RichardRichard Trusted Regular Registered Posts: 373
    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.
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,035
    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).
  • RichardRichard Trusted Regular Registered Posts: 373
    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.
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,035
    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.
  • PGMPGM Font Of All Knowledge Registered Posts: 1,954
    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 :)
  • readerreader Experienced Mentor MAAT, AAT Licensed Accountant Posts: 1,035
    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
  • crispycrispy Trusted Regular SouthamptonRegistered Posts: 452
    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
  • coojeecoojee Experienced Mentor Registered Posts: 794
    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).
  • sscorssscors Feels At Home Registered Posts: 72
    Hurray I understand
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