Accruals - Please help :(

xHolmesyxxHolmesyx Registered Posts: 15
Hi Guys, I'd really appreciate some help with the below question please:

Task 4:

This Task is about accounting for accruals and prepayments of income and expenses.

You are working on the accounting records of a business for the year ended 31 Oct 2007. In this task, you can ignore VAT.

The balance on the commission receivable account at the beginning of the financial year is £5,300. This represents and accrual for commission receivable as the end of the year on 31 Oct 2006.

A) On 01/11/2006, what balance will the commission receivable account show?

The answer is £5,300 Debit but I'm not sure why this is the case? With an accrual for commission receivable I thought it would be a debit to commission receivable and then a credit to commission income? and then in the new financial year it would be a reversal so a credit to commission receivable and then a debit to commission income?

There must be something I'm not understanding, if someone could help with this it would be much appreciated :).



Comments

  • xHolmesyxxHolmesyx Registered Posts: 15
    Slight typo...... 'this represents and accrual' should be 'this represents an accrual'
  • PeterCPeterC Registered, Tutor Posts: 146
    I agree that the question is ambiguous. Like you, I would credit commission receivable and debit commission income on 1/11/2006. Do they want the balance before or after we do this? Apparently, they would like it before we reverse the journal. I guess what they really want is the opening balance for y/e 31/10/07.
    xHolmesyx
  • LH18LH18 Registered Posts: 2
    edited January 2018
    I am studying this module at the moment too and have been trying to get my head round accruals and prepayments!

    The way I understand it there are 2 types of accrual you could deal with – expenses and income. As this is receivable, this indicates to me if would be income. With income, the amount is initially posted in the credit side of the income account, commission receivable, with the debit side of the double entry going to the accrual income account. This balance is then bought down to the next period (we also know this as a reversal) as a debit, so this is why they say it is £5300 debit I think.

    Hope this (and the attached summary table I made using your example) helps? :)

    If I’m wrong I’m sure someone will correct me, but this is the way I am understanding it at the moment!
    xHolmesyx
  • xHolmesyxxHolmesyx Registered Posts: 15
    Thank you very much for the reply it was very helpful. The thing that was confusing me was that I know with income accounts they usually increase with a credit but with a receivable account I thought they increased with a debit so assumed the first entry into the commission receivable account would be a debit?
  • LH18LH18 Registered Posts: 2
    edited January 2018
    No problem! I think I see why you may be confused as you seem to be seeing income and receivable as different things? Hopefully this might help a bit:

    I would think of income and receivable as the same thing - it is money owed to you so the initial entry is a credit to the income/receivable account and a debit to the accrual account. Think of expenses and payables as the same thing too - money you owe so the initial entry is a debit to the expense/payable account and a credit to the accrual account.
    xHolmesyx
  • xHolmesyxxHolmesyx Registered Posts: 15
    Thanks a lot for your help makes sense now :).
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