How do Accruals Work?

Georgie1975

Hi guys,

I am currently studying AAT Level 2. However, I recently applied for a job which included a finance test. The question below was included in the test.. However, I am not sure what an accrual is, and whether is should have been a credit or a debit. Please can you help, so I can get this kind of question right in the future. My feedback from the test was that my answers were not quite good enough, and I know I probably got the below question wrong as I guessed the answer.

Question: The balance on a research grant account at the end of the month is a debit
of £4,000. On review you discover that £9,000 of salary costs have been
posted to the account in error and an accrual for £3,000 for lab costs is
required. What is the revised balance on the account after your adjustments?

Thanks for your help!

Victoria95

Hello,

I am currently studying level 2 also so not sure if I am 100% correct but as no-one has replied I thought I would try to help.

In this case (because its an expense account) the accrual would be a cost that the business have not yet had, but need to account for it in the period. For example a company received 20 books in March, they have got the benefit of the books but they haven't yet been invoiced, so they put the accrual onto the ledger to show that the cost. The accrual will reverse out next period, and then when the invoice comes in they will put the cost back in to show the actual transaction.

So in the example you mention above

Balance is £4,000
Less £9,000 for the mistake
Now balance is credit of £5,000
Plus the debit accrual of £3,000
Revised balance is £2,000 credit

Can anyone with more experience help?
Is this correct or have I misunderstood?

Cheesypeesy

Looks right to me!

MissFinance

I have created a quick ten minute accrual tutorial video for anyone who is struggling with accruals and T accounts, here is a link below for you https://youtu.be/MD0ZYjjd6fE Also come and join our facebook group where we all support one another through the AAT examinations https://www.facebook.com/groups/813116915891471

PeterC

That's a useful video from MissFinance. If you would like to see a video explaining the concept of accrual (and prepayment), try https://youtube.com/watch?v=lrgJKoT2Rg8&t=197s