Accruals and Prepayments help!!

Sam22

I'm doing my Level 3 and I'm looking at the accruals and prepayment chapter. I understand everything in the chapter - or so I thought. However doing the Activities at the end of the chapter I'm a little confused by it all. It's the postings to the accounts that's confusing me. Can anyone shed some light on this?

Thanks

katsutlieff

Sam,

What book are you using. Could you maybe post a little more information. Accurals and prepayments aren't my strong point but I will have a go

Sam22

I'm using the Osborne books. Accounts Preparation I and II.

So for example. One of the activities is as follows:
Accounts for a business for the year ended 30th June 20-3
You have the following information:
Prepayment for rent received - £450
Accrual for vehicle expenses - £220

The bank summary for the year shows rent received of £5850. Included is £1350 for three months ended 31st August 20-30 and payments for vehicle expenses of £6450. In July 20-3, £380 was paid for vehicle expenses incurred in June.

You are to prepare the rent received account and vehicle expense account for the year ended 30th June 20-3 and close it off by showing the transfer to the income statement.

What I don't understand is why in each of these accounts (I've looked in the answers) you start with the balance brought down on the credit side?! I've gotten really confused somewhere along the line I think.

Any help would be great! Thank you

katsutlieff

I have had a good look at this and have realised how incredibly rusty I am!

As a starting point have you looked at the e-learning on the MyAAT there maybe some help there.

I am off to dig out my FRA books, will be back soon

katsutlieff

I'm not sure where the £220 accrued vehicle expenses has come from.

Closing the account otherwise will be as follows.

Vehicle expenses has a debit amount of £6450 for the year, add in the £380 as an accrued expense, this will total £6830 and will show on the Debit side.

The £380 will be credited to the accruals account and the full amount of £6830 will be debited to the Profit and loss account as this is the full amount of expense accrued in the year.

This closes off the Vehicle expense account.

Once the bill of £380 is paid the accrual account will be debited and the bank credited

katsutlieff

really really rusty on this one.

Rent received is £5850, £900 of this is a prepayment for July and August.

£900 will be credited to the Prepayment account
£4950 Credited to the Profit and loss account

This will close off the Rent received account

Then I think the prepayment is credited back to the Rent received account at the beginning of the new financial year.

I think I may have to do some revision of FRA before I start ACCA :blushing:

omega man

I think i can help you with your thinking prepaid income is a liability as you have not given the service yet,so that is why its a credit.
Just like accrued expenses are a credit you owe for expenses for a service you have received, but not yet paid for and this is why its a credit.
Debit prepaid expenses and accrued income-credit accrued expenses and prepaid income.

Sam22

Thanks guys. You've been a great help. I feel a lot more confident about this now and I think I finally have my head around it!!

Katsutlieff - Good Luck with ACCA! That's my next step once AAT is completed.

OlgaGarrett

Accurals and prepayments aren't my strong point but I will have a go

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