Accruals

What are Accurals?

They are the expense that you ahce already incurred but have not yet paid for.

For example; you are using the electricity today to run your light bulbs, computers etc, but you will not be billed for it until the end of next month. and let us assume that the end of your accounting period is at the end of this month.

Question! should you account for the electricity used during this month in your accounts? If yes what accounting concept are you applying?

The answer is YES and the accounting concept is the ACCRUALS CONCEPT that says that you must match all the income and all the expense (paid or unpaid) to that accounting period.

Therefore if we have incuured an expense we need to estimate the expense and add to total expensed already paid for.

At the end of year:
the double entry therefore is DEBIT Electricity Expense for say £150
and CREDIT Accruals for £150

Electricity expense will go up by £150 and that will end up in P&L a/c
Accruals are not yet paid for and therfore it is unpaid creditors and will be shown under current liabilitites in the balance sheet on the last day on the year!

On the very first day the above entry is reversed.
the double entry therefore is DEBIT Accruals for say £150
and CREDIT Electricity Expense for £150

Can you have a CREDIT balance on an expense a/c?

NO:
So on the 30th on the new month when you pay from bank for last month's electricity

the double entry will be DEBIT Electricity Expense for £150
and CREDIT Bank for £150.

Now the Expense a/c will have a NIL Balance and Accruals will have a NIL balance!

I hope this clears your understanding.