Accruals and Prepayments and Stock

Re:Accruals and Prepayments and Stock

Accruals are items for which we have received the service or goods but for which the invoice has not yet been received and therefore the accounts do not reflect the cost of the goods or services received. A common example of this would be accountancy fees. External accountants will prepare accounts for the year-ended 31 December 2006. At the year-end date the accountants won't have raised a bill so they will accrue the fee in the accounts by debiting accountancy fees in in the income statement and crediting accruals in current liabilities (or creditors).

Other accruals would typically be late invoices. For example, goods received on 29 December 2006 which are included stock but the invoice is dated 1 January 2007 so you would accrue for these.

Prepayments are slightly different. Lets say financial year-end is 31 December 2006, rent has been paid for the months of November, December 2006, January 2007 in the sum of £3,000.

1/3rd of the £3,000 relates to January 2007 so we need to credit the rent account in the income statement with (£3,000 x 1/3) = £1,000 and debit prepayments in current assets.

Closing stock is always to be valued at lower of cost or net realisable value. If the items to be excluded are stated at the lower of cost of net realisable value (which presumably they will be) then you take out the value of these accordingly but always show how you have arrived at your closing stock valuation in a working on a separate page.

Kind regards.
Steve