Accruals and Prepayments- Protect Me!

Brain

This task is about accounting for accruals and prepayments and preparing a trial balance.

You are working on the final accounts of a business for the year ended 31 March 20x1. In this task, you can ignore VAT.
You have the following information:

Balances as at: 1 April 20X0

Accrual for Administration Expenses 790
Prepayment for selling Expense 375

The bank summary for the year shows payments for administration expenses of £6190. Included in this figure is £1800 for the quarter ended 31 May 20X1

a) Prepare the administration expenses account for the year ended 31 March 20x1 and close it off by showing the transwfer to the Profit and Loss Account

In my answer to part a the administration expenses account has Accrual BD 790 Credit Entry. I do not understand why that is and can not make sense of it. It also has Prepayment CD of 1200. Do not know why/how and P&L 4200 Credit Entry. Can't understand. Please Help!

Rebeccascott

Hello Brain

Here's an explanation, I hope it helps.

Why the £790 b/d credit entry?
This is at the start of the financial year you are dealing with i.e. 1st April 20X0. It represents admin expenses which were incurred in the last financial year but were not paid in the last financial year. An accrual will have been created on 31st March 20X0 debiting admin expenses (increasing the expense) and crediting accruals (increasing the liability). This is why you see the credit on 1st April 20X0 - it represents a liabiliy at the start of the year for admin expenses incurred last year but due to be paid this year.

Why the £1200 c/d credit entry?
This is at the end of the financial year you are dealing with i.e. 31st March 20X1. It represents admin expenses paid in the financial year but which will be incurred in the next finanical year i.e. they have been prepaid (paid in advance). It would be wrong to account for them as an expense in year-ending 31st March 20X0 as too high an expenses figures would be reported . We therefore credit them out (that's the c/d) and they will be debited in a prepayment account as an asset (or b/d as a debit on the admin expense account at the start of next year).

The amount of £1200 is 2/3 of the £1800 paid. £1200 has been prepaid. That's because £1800 covers the 3 months March, April and May. The year end you're dealing with ends the end of March, so April and May are prepaid.

Why the £4200 credit entry?
Once you have entered the opening and closing balances and the bank payment in the admin expenses account, the balancing figure is the transfer to the profit and loss account.

I hope that helps. Accruals and prepayments can be a tricky topic to understand when you are new to them.

Kind regards
Rebecca