Accruals & Prepayments

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Presentation transcript:

Accruals & Prepayments Mark Fielding-Pritchard mefielding.com

Principle Sally moves to New York from London. She goes to work by metro. On 1 January 2016 she buys a one year metro/subway/underground ticket paying in cash $1200. The ticket allows unlimited travel all year, 2016, on the metro. When her mother asks how much does it cost to travel on the metro does Sally answer It costs $1200 on 1 January but it is free the rest of the year, or Does she answer $100 a month? 1) Is the cash basis, 2) is the accruals. Accruals basis recognizes expenses when the arise, not when they are incurred mefielding.com

Accruals Dr Cr Accrual Telephone 12 Accruals An accrual is an expense we have incurred, but where we have not yet received the invoice ie mobile phone You talk today for 2 hours on 31/12 on your mobile. The bill will come in 1 week. How much is the month end accrual if you pay 10c a minute? Dr Cr Accrual Telephone 12 Accruals Accruals are shown as a current liability in the BS mefielding.com

Interactive Question 1 P234 2002 Cash paid 1060.55 Accrual 327.68 491.52 x 2/3 Expense 1388.23 Journal Dr Electric 327.68 Cr Accruals 327.68 mefielding.com

Prepayment Dr Cr Prepayment Prepayments 100 Telephone A prepayment is an expense we have not yet incurred, but where we have paid in advance You pay in advance your mobile. You pay on 31/12 $100 for January Dr Cr Prepayment Prepayments 100 Telephone Remember during the year we cash account. Accruals and prepayments are a period end adjustment. When you pay your phone it will, at that time debit the expense account. Prepayments are shown as a current asset in the BS mefielding.com

Reversals- Accruals See Interactive Q1.1 P234 Dr Accrual 327.68 Cr Expense 327.68 2002 Cash paid 1060.55 Accrual 327.68 491.52 x 2/3 Expense 1388.23 31/12/02 Dr Electric 327.68 Cr Accruals 327.68 2003 Opening Accrual (327.68) Cash paid 2213.39 Accrual 502.16 753.24 x 2/3 Expense 2387.87 31/12/03 Dr Electric 502.16 Cr Accruals 502.16 mefielding.com

Reversals- Prepayments See Interactive Q1.1 P234 Assume payments made in advance !!! 2002 Cash paid 1060.55 Prepayment (39.09) 117.28 x 1/3 Expense 1021.46 31/12/02 Dr P’pay 39.09 Cr Expense 39.09 Reversal 1/1/03 Dr Expense 39.09 Cr P’pay 39.09 2003 Opening P’pay 39.09 Cash paid 2213.39 P’pay (206.67) 620 x 1/3 Expense 2387.87 31/12/03 Dr P’pay 206.67 Cr Expense 206.67 mefielding.com

Interactive Q2 P238 2006 P&L 2006 Cash December 2005 salary Team (12000) 8000 2006 Salary Team (13200) 105600 96800 Trainee 4200 3500 109800 108300 Op Accrual (8000) Cash paid 108300 Cl Accrual 9500 109800 mefielding.com

Interactive Q3 P239 Rental PP Copy Ac @31August x4 1400 500 Op Accrual (500) Op PP 1400 Cash paid Rental 9000 Cash paid Copy 6350 Cl Accrual 650 Cl PP (1800) 15100 mefielding.com

Interactive Q4 P241 P&L Sales 156000 Op Inv 10000 Purchases 65000 Carriage In 1000 Cl Inv (13000) (63000) 93000 Distribution (10+2) 12000 Admin (15+3-1.5) 16500 Finance (5000) (33500) 59500 mefielding.com

Interactive Q4 P241 Balance Sheet Assets NCAs 200000 Current Assets Inventory 13000 Receivables 54000 Prepays 1500 Cash 14000 82500 282500 mefielding.com

Interactive Q4 Balance Sheet Liabiities Capital Bal b/f 180000 c/y 59500 239500 Current Liabilities Payables 40000 Accruals 3000 43000 282500 mefielding.com

Interactive Q5 P241 Admin Expenses Credit purchases 10500 Cash purchases 250 Accrual (100) Ppay 150 10800 mefielding.com

Income- Deferred & Accrued Deferred Income- payment received in advance for work we haven’t done yet Accrued income- income due to us but for which no invoice has been raised, bank interest mefielding.com

Worked Example P242 Revenue Dr Cr Deposits Initial Entry Cash 1200 31/12 Deferred Income When work done Bonus Receivables 500 (Accrued Income) Revenue mefielding.com