Accruals/Prepayments

System
System Posts: 100,534 🤖 Admin 🤖
edited June 18 in AAT student discussion
Hi,

Can someone confirm for me...Accruals are where stock have been received but waiting for the invoice to arrive.
Prepayments, for example are rent that you pay in advance. Is that the general idea?

I get confused when they arrive on the balance sheet and profit and loss.

Can someone help, Louise

Comments

  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Accruals/Prepayments

    Hi Louise,

    Here's a definition of each that might help you out.

    Accrual:
    • An expense that has been incurred in the period but has not yet been paid at the year end.
    • Shown in the balance sheet under current liabilities.


    Prepayment:
    • A payment made during the period that relates to an expense being incurred after the end of the accounting period.
    • Shown in the balance sheet under current assets.


    Hope this helps

    Hayley
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Accruals/Prepayments

    Im not sure I agree with the wording of the definition:

    "Accrual:
    An expense that has been incurred in the period but has not yet been paid at the year end"

    It dosent matter whether it has been paid or not at the year end. Im not to good on wordy definitions but its more like "goods or services supplied to the business but has not yet been entered into the accounts as at the year end" (i.e. bascially because you havent received an invoice, or it was received after the year end and at least part of it relates to the previous year.)

    An accrual is made because of the matching concept, to match revenues to costs.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Accruals/Prepayments

    I can see what your saying but an accrual is the opposite to a prepayment isn't it?

    I was taught that if say £1000 of rent was still owing after the year end then it was an accrual. I was never told that if an invoice wasn't received after year end it was an accrual.

    I'm only saying what it says in the book.
  • System
    System Posts: 100,534 🤖 Admin 🤖
    Re:Accruals/Prepayments

    Thanks for the advice, it's helped to know what financial transaction belongs on - either P&L Account or Balance Sheet.

    I'll get there, many thanks.

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