Prepayments & Accruals

System

I have done a bit about Prepayments and Accruals before, but i need some help!

It's the first year of a cleaning business and i have been asked to do the Prepayments and Accruals. Are Prepayments like Accountancy and Telephone? What are Accruals?

Also, how do you work out Accruals?

We don't do rates as she doesn't have a property.

I have analysed the bank and posted the journals, but her bank is both personal and business.

I'd like to have a go and show my boss what i have done.

Any help would be greatful!

Thanks in advane

System

Re:Prepayments & Accruals

Accruals are things that you havent yet paid like accountancy - prepayments are where you pay in advance - perhaps standing charges on phones and electricity - or if you take out an advert for a whole year then that would be a prepayment - accruals are things that relate to that particular year but you just havent paid for them yet!

System

Re:Prepayments & Accruals

claudialowe wrote:

Accruals are things that you havent yet paid like accountancy - prepayments are where you pay in advance - perhaps standing charges on phones and electricity - or if you take out an advert for a whole year then that would be a prepayment - accruals are things that relate to that particular year but you just havent paid for them yet!

To be a bit pedantic, accruals are things not yet invoiced for goods or services that have been received.

An example of accruals would be:

You receive widgets (a tutor's favourite!) on 28th Dec and invoice the customer who takes them immediately on 29th Dec. The supplier of the widgets has not actually sent you their invoice yet (or they have, but it is caught up in the Christmas post). You would accrue the expected cost in December and reverse the accrual in January once the invoice was received.

With Electric, Gas and Telephone bills you are charged a standing charge in advance - this part is prepaid. The cost of the actual supply should have been accrued over the preceeding three months.

The idea of accruals and prepayments is to ensure all charges are taken in the month they are incurred.

It may help to think in terms of "if the business closed today, what would be my position". If you can get a refund for something you have paid for already, this should be a prepayment and written off over the time that a refund would be valid. (A recruitment fee is a prepayment and it is refundable in specific percentages and therefore should be written off in those specific percentages). If you haven't paid for something but you have used it and could expect a bill to arrive for it after the business ceased, then this is an accrual.

Hope this helps.