Monday, 24 January 2022

Accruals

 



An accrual is an amount outstanding for payment by the end of an accounting period, so has not been entered into the ledger accounts.

 

In accounting for accruals, the effect that needs to occur will be to increase the relevant expenditure in an attempt to account for the outstanding transactions which may not have been paid for and then to increase the liability in that accounting period, recognising that the business owes that amount.


Example:

You are working on the accounting records of a business for the year ended 31 January 20X7. You are looking at the business rates expense for the year and this shows payments for the following periods:

 

February 20X6 – September 20X6- Office 1

£980

February 20X6 – December 20X6- Office 2

   £1,054

 

Calculate the value of the adjustment required for the business rates account as at 31 January 20X7 and show the journal entry needed for the relevant adjustment.

Solution:

 

 

Accruals

February 20X6 – September 20X6- Office 1

£980

£980/8x4= £490

February 20X6 – December 20X6- Office 2

   £1,054

£1054/11x1=95

Total accruals adjustment needed

 

£490+£95=£585

                      

Account name

Amount (£)

Dr/ Cr

Business rates

585

Dr

Accruals

585

Cr



Friday, 21 January 2022

Accruals and prepayments

Below is a handy chart on accounting adjustments: prepaid expenses, prepaid income, accrued expenses and accrued income. Knowing what to debit and what to credit for each will come in handy in your exams.