Accounts prep 1

JJY

i have an AP1 exam tomorrow and really struggling with the accruals and prepayments question 1.3 on the online practice papers

i understand that an accrual is something thats been bought in one financial year and then paid in another, prepayments are just going over my head all together and I'm not even sure how to show these as entries in the accounts

just as an example of the sort of question i am getting stuck on …..

" you now find out there is an unpaid bill of £1,185 for secretarial services for the 3 months ended 30 april 20X7 that has not been included in the accounting records , secretarial services are classified under administration expenses

Q: Taking in to account this information complete the following statements

the amount transferred to the statement of profit or loss for admin expenses will be …..

£££ …. Greater or Less than the figure carried down in C ?

( C having a balance carried down of 10590 and a closing balance of 12580 )

Amin expenses will show as a …….. in the profit or loss account in the general ledger ?

this question makes absolutely no sense to me

would be great full if someone could break it down for me

cheers

CeeJaySix

Accruals are for expenses incurred in the current period, that are not physically paid for until the next period. For example, if your year-end is 30th April, and on the 1st May the cleaning company sends you the bill for April, that needs to be accrued for. This is because the expense relates to the year you are reporting on, even though the invoice arrives after the year-end (obviously if the invoice arrived before the year-end, it would be posted to the purchase ledger). The one accrual nearly every company will have every year is their accountancy fees! The year-end accounts aren't normally prepared until several months after the year-end, but the expense (when it is eventually incurred) still relates to the period you're reporting on, so an allowance has to be made for it.

To enter an accrual, you debit the expense account and credit accruals. This has the effect of showing the extra expense in the profit and loss, even though you haven't paid for it or posted it to trade creditors, as well as putting a credit balance on the statement of financial position, which shows that the business has a liability.

Prepayments are the exact opposite; they are things that you have paid for in the current period, that you won't have the benefit of until the next period. For example if you pay £1000 per month rent, paid quarterly in advance, and your last payment for £3000 was on 1st April, that means you have paid for two month's rent (May and June) in the next period. However, when you paid the rent, you debited the Rent expense and credited the bank for the full £3000. So to make the prepayment, you debit Prepayments, and credit the expense code. This has the effect of reducing the amount of the expense in the profit and loss (as it relates to the next period, not the current one), and showing a debit balance on the statement of financial position, meaning the company has an asset (the benefit of two months rent not yet used).

Does that make sense?

So to your question:

I'm assuming the date given (30th April 2017,) is the year end, and that C is the administration expense account in the profit and loss, which had a balance at the year end of 12,580 (not sure why you have a closing balance and a balance c/d - same thing? Doesn't matter what the figure is as we're not doing any maths here).

The admin expense account will be a debit, as it's an expense in the profit and loss. Your invoice is after the period end, but relates to the period you're reporting on. Therefore it's an expense that at the moment isn't included in the profit and loss for the year, so we need to make an accrual for it. As above, debit expense, credit accruals. So you'll be increasing the balance in the expense account by the 1,185, and it will be a debit balance.

JJY

thank you very much ceejaysix i can work with that nice one !