Confused on Accruals - HELP!!

luciedriver

Hi

Just wondering if someone could help clear up Accruals for me that I am finding difficult to comprehend at this moment!

I have just started these at work and unsure why an accrual is reversed in the following period?

Is there a set rule for accruals or can someone try to explain it to me using layman's terms please?

Also, am I correct in thinking an accrual for an expense you would DR the expense nominal and CR the accruals and for a Sales accrual you would DR the accruals and CR the sale nominal?

Any help or advise greatly appreciated

Thanks very much

Adele69

a typical 'expense' example would be utilities eg Electricity where there is ongoing usage and quarterly billing, but is out of sync with the accounting period.

The accrual concept says that income and expenses should be matched in the period they occurred, not when paid.

Accrued expense Dr---> increase exp in current year /reversal/ decrease in future year
Prepaid expense Cr---> decrease exp in current year /reversal/ increase in future year

Accrued income Cr---> increase inc in current year /reversal/ decrease in future year
Prepaid income Dr---> decrease inc in current year /reversal/ increase in future year

I tend to think of Accruals and Prepayments a bit like Suspense but for clearing up issues between accounting periods, so both sides of journal need doing, and the invoice being paid (or income received) in whatever period is the actual transaction. I'm not so good on the income side though may in part be account titles such as Commission Received

CeeJaySix

Imagine that at the simplest level, to recognise an expense you dr expense, cr bank.

As Adele says, there may be costs incurred that you have not yet paid for. This is where you put in your accrual, in order to recognise the cost.

In the next period you actually make the payment relating to the accrual. Assuming your entry is to dr expense, cr bank, you have now recognized the cost twice (one on making the accrual, and again on making payment).

By reversing the accrual, you remove this duplicate cost entry.

The alternative is that when payment is made, you dr accruals (rather than expense), cr bank.

luciedriver

Thank both for the help..

I am sure I understand now, you are effectively matching the expense in the correct period it is relevant to. So to accrue the expense, dr expense account & cr accruals, and the opposite for the reversal in the month the bill is received, dr accruals & cr the expense account.

And presuming accruals for sales, example rent received, this would be to dr accruals & cr the rent received / sale nominal.. and the opposite when reversing.

Have I grasped it?? Hope so!

Thanks again

luciedriver

Also, when filing invoices for Prepayments and Accruals for the relevant months could you advise how these would be kept, for example.. if I have an invoice dated September but relates to October, is a Prepayment, would I file this in September or October

And the same on Accruals, if I have an October dated invoice that relates to August to be accrued, would I file it in August or October?

Does this make sense??

So do I file Accruals and Prepayments in the month they are invoiced or the month they relate to?

Thanks in advance, again!

PeterC

You might find the following helpful:
media.wix.com/ugd/9a8e75_c1b532cc349c4171994388ac4b34ef52.pdf

How you file the invoices is up to you/your organisation. One approach is to file by month of payment but keep prepayments in a separate file until no further adjustments are required.

luciedriver

Thanks Peter - Yes I guessed it would depend on the company.. will take a read of the link thank you

luciedriver

Another quick question please..

If I have an invoice dated September and it relates to 01st September to the 04th October, would I prepay ONLY the 4 days that relate to October because the rest of the invoice relates to and is dated for September, and so is correct as it is?

PeterC

Yes, I would agree with what you propose. You might even consider not doing any prepayment, if the amount is not material.

luciedriver

Thanks Peter, I think this has helped..
I would consider the amount material, as high invoice amounts, and the invoices are always split over the months.. thanks for the advice, will help me going forwards

PeterC

You're welcome