Week 3 Accruals and Prepayments. Aims To introduce the accruals concept and its effects on the financial statements. Objectives At the end of these sessions,

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Presentation transcript:

Week 3 Accruals and Prepayments

Aims To introduce the accruals concept and its effects on the financial statements. Objectives At the end of these sessions, you should be able to: 1. Describe the purpose of the accruals concept and how it affects the financial statements. 2. Make the necessary adjustments to account for any year end accruals and prepayments in both the main ledger and the final accounts. 3. Complete the ETB, making the necessary adjustments for any accruals and prepayments and produce the final accounts.

Week 3 Accruals and Prepayments

Definition An expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts.

20X0 JanFebMarAprMayJunJulAugSepOctNovDec 20X1 JanFebMarAprMayJunJulAugSepOctNovDec 20X2 JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Energy Costs 31/12/X5Balance b/d675.02

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Energy Costs 31/12/X5Balance b/d /12/X557.85

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Energy Costs 31/12/X5Balance b/d /12/X Accruals 31/12/X5 Energy Costs To P & L Account as an EXPENSE To Balance sheet as a LIABILITY

Summary of posting:  Debit the expense account to increase the expense to reflect the fact that an expense has been incurred; and Credit an accruals account to reflect the fact that there is a liability for the expense. Your Journal would be: Dr Cr DrEnergy Costs57.85 CrAccruals57.85 ‘Being energy costs not invoiced for at year end’

Shop Rent 20X8 £ £ 31/3Cash3,000 29/6Cash3,000 2/10Cash3,000

Shop Rent 20X8 £ £ 31/3Cash3,000 29/6Cash3,000 2/10Cash3,000 31/12Accrual3,000

Shop Rent 20X8 £ £ 31/3Cash3,000 29/6Cash3,000 2/10Cash3,000 31/12Accrual3,000 12,000

Shop Rent 20X8 £ £ 31/3Cash3,000 29/6Cash3,000 2/10Cash3,000 31/12Accrual3,000 31/12P & L A/C12,000

Shop Rent 20X8 £ £ 31/3Cash3,000 29/6Cash3,000 2/10Cash3,000 31/12Accrual3,000 31/12P & L A/C12,000 1/1Accrual b/d3,000

Telephone 20X8 £ £

Telephone 20X8 £ £ 31 MarCash845

Telephone 20X8 £ £ 31 MarCash MarAccrual170

Telephone 20X8 £ £ 31 MarCash MarAccrual MarP & L A/C 1015

Telephone 20X8 £ £ 31 MarCash MarAccrual MarP & L A/C AprAccrual b/d170

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Electricity Bills are received quarterly Cost to end October£5000 (Year end 31/12/2014) 2014 JanFebMarAprMayJunJulAugSepOctNovDec 2015 JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts 2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Bill for £1800 covering quarter ending January 2015 is received in February ‘ JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Bill for £1800 covering quarter ending January 2015 is received in February ‘ JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts Monthly share of £1800 ÷ 3 x JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts 2014 share of £1800 ÷ 3 x JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600

A n expense that has been incurred during the period but has not been paid for by the period end and has therefore not been entered in the ledger accounts 2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost is accrued

2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost is accrued Energy Costs 31/12Bank5000 Accruals

2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost is accrued Electricity Costs 31/12Bank5,000 31/12Accrual1,200 Accruals

2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost is accrued Electricity Costs 31/12Bank5,000 31/12Accrual1,200 Accruals 31/12Electricity1,200

2014 JanFebMarAprMayJunJulAugSepOctNovDec JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost is accrued Electricity Costs 31/12Bank5,000 31/12Accrual1,200 31/12To SOCI ,200 Accruals 31/12Electricity1,200

2015 JanFebMarAprMayJunJulAugSepOctNovDec 600 £1200 electricity cost accrued is now the b/d balance Electricity Costs 1/1Bal b/d1,200 Accruals 1/12Electricity1,200 31/12Electricity1,200

Insurance Costs On 1 st March 20X7 paid £1500 for 12 months Accruals 20X8 July AugSepOctNovDecJanFebMarAprMay June 20X9 July AugSepOctNovDecJanFebMarAprMay June

July AugSepOctNovDecJanFebMarAprMay June Electricity Costs Accruals

July AugSepOctNovDecJanFebMarAprMay June Electricity Costs 1/7Bal b/d 320 Accruals

July AugSepOctNovDecJanFebMarAprMay June Electricity Costs 30/6Bank13401/7Bal b/d 320 Accruals

July AugSepOctNovDecJanFebMarAprMay June Electricity Costs 30/6Bank13401/7Bal b/d /6Acc (May)180 30/6Accr (June)150 Accruals

July AugSepOctNovDecJanFebMarAprMay June Electricity Costs 30/6Bank13401/7Bal b/d /6Acc (May)180 30/6Accr (June)150 Accruals 30/6 Electric Accrued330

Insurance Costs Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June 20X9 July AugSepOctNovDecJanFebMarAprMay June

Insurance Costs Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June X9 July AugSepOctNovDecJanFebMarAprMay June

Insurance Costs 1 JulyBal b/f1000 Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June X9 July AugSepOctNovDecJanFebMarAprMay June

Insurance Costs 1 JulyBal b/f MarBank1800 Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June X9 July AugSepOctNovDecJanFebMarAprMay June 150

Insurance Costs 1 JulyBal b/f MarBank1800 Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June X9 July AugSepOctNovDecJanFebMarAprMay June 150

Insurance Costs 1 JulyBal b/f MarBank1800 Prepayment 20X8 July AugSepOctNovDecJanFebMarAprMay June X9 July AugSepOctNovDecJanFebMarAprMay June 150

Insurance Costs 1 JulyBal b/f100030/6Prepaid MarBank1800 Prepayment 30/6Insurance X7 July AugSepOctNovDecJanFebMarAprMay June X8 July AugSepOctNovDecJanFebMarAprMay June 150

Insurance Costs 1 JulyBal b/f100030JunePrepaid MarBank Prepayment 30/6Insurance X7 July AugSepOctNovDecJanFebMarAprMay June X8 July AugSepOctNovDecJanFebMarAprMay June 150

Insurance Costs 1 JulyBal b/f JunePrepaid MarBank1800Xfer to IS Prepayment 30/6Insurance X7 July AugSepOctNovDecJanFebMarAprMay June X8 July AugSepOctNovDecJanFebMarAprMay June 150

Rates Rent Rental Income

Rates Bal b/d120 Rent Rental Income

Rates Bal b/d120 Rent Bal b/d800 Rental Income

Rates Bal b/d120 Rent Bal b/d800 Rental Income