Accruals .... I'm sorry - The Book-keepers Forum (UK)

Rhianrach · Expert

Accruals .... I'm sorry

Shamus · Forum Moderator & Expert

Hi Steve,

Accruals is one of the basic concepts (see FRS18, Accounting Policies). It's also known as the matching concept in that revenue and expenditure must be matched to the period to which it relates.

This isn't simply a matter of considering debtors and creditors but rather to what period revenue and expenditure relates. That includes things like Rent, Rates, Insurance, etc.

For example, take a company whose company year runs from 1st June to 31st May. During the year annual insurance is taken out on 31st December so six months of that insurance relate to the current year and six months to the following year.

At year end for that one you have a prepayment of six months insurance.

Another example (an accrual this time) might be rent paid in arrears in that you will have used the service before paying for it.

The payment needs to be allocated to the period to which it relates, not the period in which it was paid.

Taking our above example again imagine that we moved into the new property one month before year end. First rental is due three months after moving in.

In this case one month belongs to the current period and two months to the next company year.

Got to go out so I'll leave it to someone else to explain the actual treatment of the accruals and prepayments. If you've not received an answer by the time I get back from Sainsbury's I'll run you through the actual entries that need to be made.

kind regards,

Shaun.

Rhianrach · Expert

Cheers Shaun for the reply. smile

Just working through Frank Woods Business accounting 1 I shall see what he has to say but I think it's looking like something to leave alone till I have more of an idea hopefully from here as you all seem to explain it very clearly and simply. biggrin

Just wondering also when this crops up in AAT thinking maybe its an intermediate thing.

Alls I'm thinking when I look at the concept is that the suppliers have supplied the goods before the end of the month and we will be paying them after the end of the month so maybe they need popping into the accruals a/c as we have recieved the goods but not paid, or is it just for services,.......... confuse

-- Edited by Rhianrach on Saturday 13th of March 2010 12:17:34 PM

Wella · Expert

As it is Creditors you are dealing with, you do not have to worry about moving them into an accruals account.

Accruals and Prepayments are more likely to be a year end adjustment unless there is a need to do otherwise.

It's normal to group Debtors and Prepayments together and Creditors and Accruals together on the balance sheet

In your case I don't think any adjustment is needed, as Creditors are always Creditors and not moved to an Accruals account. As Shaun started to say, before neccessity interrupted him, an example of an Accrual would be a Telephone bill, that you know will arrive after the end of your accounting period but is for your current accounting period. You don't know how much it is but it is still a debt owed and an expense against profit in your current period. So you take your most accurate guess (possibly using a previous bill) and move it into your Accruals account. It is not the same as any amount you actually owe BT which is still outstanding on their account (if that makes sense?)

Bill
The opposite to that is a prepayment, which is not quite the same as a debtor. As it suggests it is for a payment made in your current period but for supply in your next , again Shauns example of rent in advance is good.

-- Edited by Wella on Saturday 13th of March 2010 12:45:22 PM

RobH · Expert

Hi,

Leave your debtors and creditors alone, actual payment isn't the issue here. I'll give a different example of an accrual from Shaun's. I do a set of accounts for the year ended 31st December 2009. I cannot actually offer my accountancy service to that company until after the year end so I finalise the accounts at 31st March 2010 but my accountancy bill that I am about to send to the client relates to the year ended 31st December 2009. So I will accrue my charges (ie as Shaun says I will match my service to the period it relates). I want to charge the client £500, so my journal entry will be :

dr accountancy £500 (more accountancy will show in P & L)
cr Accruals £500 (shows in Balance Sheet as a creditor along with trade creditors because it has not been paid)

I also notice that there is an invoice for buildings insurance dated 30th September for £1000. But I check the invoice and it is for a years worth of insurance, so the client has 12 months of insurance in the books but only 3 months of it actually applies to the year in question. I would journal:

dr prepayments £750 (Shows in Balance Sheet as an asset as it has been paid in advance)
cr insurance £750 (less insurance will show in P & L)

Hope this helps.

Rhianrach · Expert

Yep the three amigos have done it again, all your explainations have made sense.

If they pay their Water bill in full, it will be from 1st april through to 31st March and their year end is 31st December and it is £1200, therefore it would be 9 months paid for in this years trading, so I would

Cr water £300 The amount unused in this period
Dr prepayments £300 an asset for the next year, 3 months of water paid

Or alternatively (although I'm sure the water board would be a tad miffed) they didn't pay till the end of March next year then this would show as an accrual at the year end of 9 months of water and would need posting to the accruals a/c, so I would

Dr water £900 The amount used in this period
Cr accruals £900 the amount I still owe for that periods usage.

If this is right then my next question would be, Is it the accountants job to sort this or mine although looking at the explainations and at the way the people I'm doing this for do things I'm certain there won't be much needs doing only services that are paid monthly oh and there is a bill for services paid quarterly.

RobH · Expert

Actually in both cases it would be Cr water £300 and dr prepayments £300 since there would still be £1200 in the creditors control account. Again it isn't really the actual payment that is an issue here it is matching the costs to the correct period irrespective as to whether it has been paid.

If you are doing books to TB for the accountant to finalise accounts then yes I would suggest doing this, if doing books on Sage and tghen passing the back up over then the accountant may expect to doit. Best speak to the accountant at the time and ask.

The three amigos ride again!

Wella · Expert

Rhianrach wrote:
Just working through Frank Woods Business accounting 1 .........

Good choice of reading material, you seem to be grasping it well.

One thing we haven't mentioned is that these are period end adjustments that need to be reversed at the beginning of the new accounting period

Rhianrach · Expert

RobH wrote:

Actually in both cases it would be Cr water £300 and dr prepayments £300 since there would still be £1200 in the creditors control account. Again it isn't really the actual payment that is an issue here it is matching the costs to the correct period irrespective as to whether it has been paid.

If you are doing books to TB for the accountant to finalise accounts then yes I would suggest doing this, if doing books on Sage and tghen passing the back up over then the accountant may expect to doit. Best speak to the accountant at the time and ask.

The three amigos ride again!

I'll ask them what they want to do, in reality she wanted to cut the accountant out of the loop as much as possible but I don't think this would be a good idea at this stage, maybe next year smile

Rhianrach · Expert

Wella wrote:

Rhianrach wrote:
Just working through Frank Woods Business accounting 1 .........

Good choice of reading material, you seem to be grasping it well.

One thing we haven't mentioned is that these are period end adjustments that need to be reversed at the beginning of the new accounting period

Yeah seems to be a good book, I've just started it really but I'm nearly at the end of my foundation year AAT so only the trial balance and balancing accounts to do for that, which I think I've got sussed.

I think the book is going to be my best source to be honest, and it seems to be going well at the moment so fingers crossed.

Thanks for all your help amigos I shall endeavour to apply this knowledge to some live examples.

Regards Steve

Shamus · Forum Moderator & Expert

Cheers Amigos.

Nails all pretty hit on heads there. Cheers Amigos... How did you know that I had started to use the telephone example Bill!

I started writing it and then thought. Haven't got time for this. Rent will have to do for now.

Well, nothing much left to say on this one.

Like the way that all of us agree with each other but give similar answers in totally different ways.

Talk later,

Shaun.

Rhianrach · Expert

RobH wrote:

Actually in both cases it would be Cr water £300 and dr prepayments £300 since there would still be £1200 in the creditors control account. Again it isn't really the actual payment that is an issue here it is matching the costs to the correct period irrespective as to whether it has been paid.

If you are doing books to TB for the accountant to finalise accounts then yes I would suggest doing this, if doing books on Sage and tghen passing the back up over then the accountant may expect to doit. Best speak to the accountant at the time and ask.

The three amigos ride again!

Hehehe still cant get my head round that, I thought prepayments was used for when you had paid for something you hadn't used, so if you haven't paid the bill but used the service then it would be an accrual.

I shall get my books out tonight when the kids are in bed and try to get my head round it, if you here an explosion it will be my head.

Had another look after a nights sleep and I now see what you mean smile

Thanks to you all for your answers

Regards

Steve

-- Edited by Rhianrach on Sunday 14th of March 2010 01:33:57 PM

Minty · Veteran Member

Wella wrote:

One thing we haven't mentioned is that these are period end adjustments that need to be reversed at the beginning of the new accounting period

Hi Wella.

Can I ask you to explain why these adjustments need to be reversed?

The reason I ask is this:

Scenario......

You are doing the books for a business on a monthly basis.

It's December 31st and the business has just paid their last rent bill (clearing any accrual up to 31st December).

It's now 31st January, and the business has accrued £1000 in Rent (a month's worth of Rent). You do the books for the month, and enter the accrual.

Between 1st February and the time when you next do the books, that £1000 is still owed by the business (and increasing daily), and you are only going to add to it again for the month ended 28th February.

Until you pay the bill you still owe money. The same with Prepayments - until the end of the period for which you have paid ahead, you are still prepaid.

Am I making sense? This is a genuine query from a newby, by the way, not questioning what you are saying, as I know it's well documented that you should reverse these adjustments at the start of a new period.

It just seems a strange thing to do. My hunch is that it's to do with some traditional accountancy thing (??).

A further point that makes me wonder is that we don't reverse Depreciation (another adjustment). So why reverse some adjustments, but not others? (or do I have that wrong - and you should reverse depreciation also?).

Hmmm........

(And Rhian - hope you don't mind my hi-jacking your thread blankstare

).

Matthew

-- Edited by Minty on Friday 19th of March 2010 09:41:00 AM

-- Edited by Minty on Friday 19th of March 2010 09:43:27 AM

-- Edited by Minty on Friday 19th of March 2010 09:58:58 AM

RobH · Expert

Minty,

if you put in an accrual for rent (Though rent is normally paid in advance but don't worry about that). Lets say rent is £1000 per month and lets say you are invoiced quarterly in arrears. After 3 months you would have put in accruals for £3000 (dr rent, cr accruals). Come month 4 you receive the invoice from the landlord relating to the first three months rent of £3000. You post this (dr rent, cr creditors). You look at your TB and it says rent £6k dr but you know it should say £3k. So you need to reverse the accrual made because the proper invoice has now come in to match the costs to the business. Hope this makes it a tad clearer.

RobH · Expert

Minty, Lamb...get it! biggrin

Minty · Veteran Member

RobH wrote:

Minty,

if you put in an accrual for rent (Though rent is normally paid in advance but don't worry about that). Lets say rent is £1000 per month and lets say you are invoiced quarterly in arrears. After 3 months you would have put in accruals for £3000 (dr rent, cr accruals). Come month 4 you receive the invoice from the landlord relating to the first three months rent of £3000. You post this (dr rent, cr creditors). You look at your TB and it says rent £6k dr but you know it should say £3k. So you need to reverse the accrual made because the proper invoice has now come in to match the costs to the business. Hope this makes it a tad clearer.

Hi Rob.

Thanks for that. I should have explained better......

I fully understand that you need to reverse when the bill is paid, otherwise you will be 'seeing double'!!. But some people make out you should reverse every month. See what I mean?

So I take it from your reply that it is fine to leave the accrual/prepayment in until the end of the period to which it relates?

Thanks. That's cleared that up for me.

PS......my surname is Lamb - hence 'Minty'!!!! Mint-sauce?

I have to stress that I look nothing like Minty from Eastenders!!!!!!!!!!!!!!!! I am good looking!!

Wella · Expert

Hi Minty

Sorry I missed your question.

Rob explained it fine and he used the word "match", which is exactly why it is done, so that an expense is matched to the period it relates to. Briefly, if you want to know what your rent was during a period you need to reverse it back in otherwise it gets losts in accruals.

Depreciation isn't reversed because it is an expense that is "consumed" in that period. Don't forget that depreciation is also accumulated for the balance sheet calculations and calculating profit/(loss) on the disposal of an asset.

Bill

Ps can you please avoid mentioning mint sauce, it upsets No8 (eyes left)

Minty · Veteran Member

Wella wrote:

Briefly, if you want to know what your rent was during a period you need to reverse it back in otherwise it gets losts in accruals.

Bill

Ps can you please avoid mentioning mint sauce, it upsets No8 (eyes left)

Ha ha! Thanks Bill.

Do you keep sheep, then?

Also, I don't understand the point above. If you Credit Accruals and Debit Rent, then you would see your rent for the period (?).

Minty · Veteran Member

And here is the avatar I use on a football forum I frequent.

<<<<<<<<<<<<<<<<<<<

I edited a line drawing with my team's colours. wink

Neil · Senior Member

Is that Reading, Minty?

Neil

Minty · Veteran Member

WASH YOUR MOUTH OUT, NEIL!

Queens Park Rangers.....there's only one team in blue & white hoops!! Reading are the 'Fake Hoops' - the 'stripes' stop halfway round wink

.

-- Edited by Minty on Friday 19th of March 2010 10:50:15 AM

Neil · Senior Member

(W)hoops.

Been an eventful year for you then. Most clubs have fewer players than you've had managers. Are you glad to see that back of Fabio?

Neil

Minty · Veteran Member

Neil wrote:

(W)hoops.

Been an eventful year for you then. Most clubs have fewer players than you've had managers. Are you glad to see that back of Fabio?

Neil

We certainly are! When he bought the club we were days away from administration, so he did save us from that, but he was so arrogant that he was killing the club from within.

With one manager, he (allegedly) handed him a piece of paper with the players he wanted the manager to start with in the next match - all 13 of them confuse

. lol!

Anyway, he has at least done the decent thing and moved aside for the really wealthy shareholders to step up. Flavio still has a shareholding, but the power has shifted to the Mittal family (richest in the UK, about 5th in the world - despite losing £17 billion in the downturn!).

http://business.timesonline.co.uk/tol/business/specials/rich_list/rich_list_search/

Happy days.

Minty · Veteran Member

PS....we've brought in 47 players in two and a half years under Flavio - too many on loan journeymen.

Hopefully we can start building a proper squad of players that are proud to wear the shirt smile

.

Neil · Senior Member

Oh yes, it's Flavio. I knew Fabio didn't sound quite right.

17 billion?!? I wish I could have lost 17 billion in the downturn.

Neil

RobH · Expert

When I played for Loughton Boys Under 11 side, Gerry Francis was supposed to be presenting us with our medals, but I think he got a bit busy captaining England, so we got Dave Webb...would have preferred Stan Bowles!

COYS

Neil · Senior Member

David Webb. A Chelsea God and distant relative of mine. You were honoured, Rob smile

Neil

RobH · Expert

Indeed...I still have the newspaper cutting from the local rag...me with my page boy haircut (my mum decided to buy a KTel haircutting tool, so us three boys all had this crooked fringe and long sides and then I was in the local paper!!!!)

Rhianrach · Expert

Minty wrote:

(And Rhian - hope you don't mind my hi-jacking your thread ).

Matthew

Feel free to hijack my thread any time you like because I still don't get it confuse

I think I've found a live example though that I may need to sort.

We pay a standing order every quarter for accounting services, (I think) and the next payment isn't due until may but we should be doing the year end in april so would I have to post to accruals the value of the services we have received (which should be one month, March) before doing the year end? confuse

Wella · Expert

I'll have a go at explaining

Very briefly, there are several reason why the adjustments are reversed.

Often the amounts accrued are estimates not actual known amounts (telephone for example). Any over or under estimate will appear as the balance.

When the invoice is received, it will get posted to the rent account. By bringing, back the accrued balance it will neutralise the invoice

Dr	Cr
£200 posted on invoice (new year)	£200 posted from accruals (reverse amount)
£000 balance

You also need to empty the accruals account so that it is clear for the next year otherwise it will accumulate, particularly if the invoice doesn't match the estimated amount.

Hope that makes sense (it would have been easier to explain a prepayment)

There are probably other reasons I havent thought of.
This is more a text book answer. In real life, the figures could be taken from a working paper.

Bill

PS Unfortunately No.8 belonged to a friend, I don't have any sheep/ lambs yet. Looking to get a small holding ASAP. Did you notice, she does carry a bit of blue but it doesnt make a hoop

-- Edited by Wella on Friday 19th of March 2010 12:29:03 PM

Minty · Veteran Member

Rhianrach wrote:
Feel free to hijack my thread any time you like because I still don't get it

I think I've found a live example though that I may need to sort.

We pay a standing order every quarter for accounting services, (I think) and the next payment isn't due until may but we should be doing the year end in april so would I have to post to accruals the value of the services we have received (which should be one month, March) before doing the year end?

Hi Steve.

I think I can simplify this for you, as I too am a newbie.

Using your 'Accountancy Services' example (this is assuming they do work for you throughout the quarter - otherwise no need to do an accrual).........

You pay them quarterly. The last time you paid them was February.

That means that between March and May you are accruing (building up) a debt. The accountancy people are doing work for you between March and May for which they won't get paid until May.

However, at the point of your Year-end that accrual is only 2 months (March and April).

The 'Matching' principle of accountancy says that, although you have not paid for this accountancy service (March and April), the business still had the use of it during this financial year, and therefore you have to record the expense.

Now.....here's the bit that hopefully will clear it up for you.......

In order to show the expense (even though unpaid for yet) AND the fact that the business owes some money (for March and April's Accountancy work), you need to enter it into the books somehow. But obviously you can't use the Bank or Cash accounts as no payment has been made yet.

That is where the 'Accruals' account in your books comes in. Think of the 'Accruals' account as a holding area for the money until it is actually paid. This enables you to show the 'expense' of the service without any entry going in Bank or Cash. So at Year-end you will be correctly showing that in the period you have used £x of Accountancy Services (Paid + the unpaid couple of months at the end of the year), plus showing on the Balance Sheet that the company owes £200 to your accountancy service provider.

Then, when the bill is finally paid this will clear your debt to the Accountancy Services provider.

The Postings are:

During the period you are accruing the debt:

End of March

Cr Accruals
DR Accountancy Services

with 1 month's worth of charge. So if your average quarterly bill is around £300, you would do the above posting for £100.

End of April

Cr Accruals
DR Accountancy Services

Same again.

Now, when you do your year-end, your books show £200 of debt, but also the £200 of unpaid services are correctly 'matched' to the period they were used in.

Finally....

End of May

You will now have had your bill from the accountancy service provider, and you can cancel the debt that is showing on your books.

CR Bank
DR Accountancy Services

Enter the bill amount - even if this amount differs from the amount you have put for accruals. Accruals are only an estimate based on previous bills.

However, doing this will mean that your 'Acccountancy Services' account is overstated, as your accruals postings are still there. The Accruals account will also still have a balance which needs to be got rid of as you no longer owe the money.

This is where the reversal comes in.....

CR Accountancy Services
DR Accruals

(with the total accruals amount you posted for March and April).

Now you only have the 'paid bill' amount in Acc. Services and zero balance in your accruals account.

I hope this clears it up a little, Steve. It's difficult to get your head around until it clicks.

Follow the above on some T-accounts on paper, and at each month end think of how the P & L and the Balance Sheet will look. Then I think you will tumble to it.

Hope that helps.

Matthew

PS - If your year-end is April 5th, then only do the March accrual.

-- Edited by Minty on Friday 19th of March 2010 01:51:03 PM

-- Edited by Minty on Friday 19th of March 2010 01:55:09 PM

-- Edited by Minty on Friday 19th of March 2010 01:56:43 PM

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-- Edited by Minty on Friday 19th of March 2010 02:14:23 PM

Rhianrach · Expert

Yeah I think year end is the end of march so I only need one month and thanks for the explaination.

It's something I get but my ability to learn normally requires me to do it in a live situation before I can sign it off as something I can do without any qualms, which, as I tend to be extremely anal is the level I require.

I shall have this sorted by the end of the financial year.

-- Edited by Rhianrach on Friday 19th of March 2010 05:10:09 PM

Rhianrach · Expert

Rhianrach wrote:

Yeah I think year end is the end of march so I only need one month and thanks for the explaination.

It's something I get but my ability to learn normally requires me to do it in a live situation before I can sign it off as something I can do without any qualms, which, as I tend to be extremely anal is the level I require.

I shall have this sorted by the end of the financial year.

-- Edited by Rhianrach on Friday 19th of March 2010 05:10:09 PM

Eureka I think I now have it cheers to all smile