Accruals question

Matt444

I'm expecting a £30k rent invoice at the end of P3 and so accrue £10k per month. At the end of P3 the actual invoice is £18k NOT £30k. This has given me a £2k credit on my P&L rent acct. The overall costs recognised in the 3 months agree however with the actual invoice.

Do I need to make any further adjustments in period 3?

Rent
10,000 Rent expense Period 1

-10000 Rent expense opening accrual Period 2
20000 Rent exp closing accrual Period 2

-20000 Rent expense opening accrual Period 3
18000 Invoice rec'd - 3 month period Period 3

Matt444

Cont...

Should I be doing the below for the adjustment for the over accrual:-

Dr - P&L expense £2k
Cr - Accruals £2k

This would mean I would recognise £30k for the 3 months rent in the P&L (£10k per month) and the accrual balance on the balance sheet would be £18k???

If anybody could clarify the final adjustments that would be great. I'm a little confused......

sdv

I don't think you are applying accounting for accuals correctly

normally in month one you would have
debited expenses (P&L) £10,000
credit Accruals (BS) £10,000

on the last day to period one and on the first day of period 2 the above entry would have been reversed leaving zero balance in the accruals accounts

In the 2nd period
Debit £20,000 in the expense account (now for 2 months)
Credit £20,000 in the Accruals account

on the first day of the 3rd period reverse the £20,000 entries
On the last of the 3rd period
Debit £18,000 in the rent account and
Credit £18,000 in the accruals account

Reverse the above entry on the beginning of the 4th accounting period.
Your are most likely to pay the in the 4th accounting period and when you pay your rent invoice
Debit Rent £18,000
Credit Bank £18,000

In your case I would reverse £20,000 from the Rent account. ie
Credit Rent £20,000 and
Debit ????? £20,000 (????= where did you credit the original £10,000 x 2)

and

Debit Rent account with £18,000 and
Credit Accruals with £18 000

At the begining of the next accounting period you will need to revere this and when a cheque of £18,000 is paid rent will show £18,000 debit balance, Bank £18,000 credit and accruals = £nil

I hope this helps

Matt444

Thanks SDV, that makes much more sense now!

If in Period 3 we settled the payment of rent on the last day of the month rather than in P4 would it be like this....

P3 - Rent expense (P&L acct)

Opening accrual - 20,000
Rent payment 18,000 ie cr bank / dr rent expense

Total balance -2,000

Add back P1 & P2 (10,000 + 10,000 - 2,000) 18,000 P&L recognition

BSheet

-10000 (p1)

10,000 (p2) open accrual
-20,000 (p2) closing accrual

20,000 (p3) open accrual

Total = nil accrual balance