I am learning about accruals/prepayments. For an assignment Im doing: I have opening balances for certain accounts including an accrual account and I have to provide a trial balance for these.
On the next question it asks for the accrual account to be reversed. Is it right to debit the corresponding expense account related to the accrual just before reversal ie the expense account does not appear in the opening trial balance stage.
Not quite sure what you mean about "debit the corresponding expense account just before reversal". If you have a list of opening balances and there is an amount as an accrual, this will form part of the Trial Balance (as a credit balance).
When you reverse the accrual you DR Accrual and CR expense account. If the relevant expense account does not appear in the opening Trial Balance this means there was no balance on it at the year end.
ok so its as simple as that DR Accrual, CR expense account.
I guess I am not sure about what the reversal is doing. When you debit the Accrual it nils that account but then we have a liability in the expense account so does this get nilled when we actually make payment?
Hiya i am new to the forum and just read your prob with accruals i had the same one 11 years ago when i first did them lol
THe expense disappears when you make a payment cause you have already accounted for the amount as an accural then when you reverse the accrual the amount should reappear in the P&L on the trail balance
e.g if you have an accrual for £50 of stationery
CR accruals £50 balance steet, DR Stationery
Then the item is paid
DR Stationery £50 CR Bank £50
then release the accrual
DR accruals £50 and CR stationery £50
So the only amounts left on the Trail balance are:
Dr Stationery £50, Cr Bank £50 and the accural account should be nil
Thanks for your explanation. if the question asks to reverse the journal does this include the payment stage or is it just DR Accrual CR expense at this point.
Also if the expense is something from last financial year what is the double entry in that year, say its accountancy fees which haven't been paid for,we have credited accruals but whats the other entry? As we are paying the fees in the new year how will this show up in the previous year. Sorry to be such a pain, think I am making more out of this than there is!
Accruals are to claim an expense during a period when they are incurred, especially if the invoice is not issued until a later period. So technically it has nothing to do with when the expense is paid (unless there is no invoice), but when its invoiced and the invoice is processed.
The accountancy fees are for doing the accounts for a previous period - hence the accrual. The invoice is not issued until a later period, which is when it is processed as a normal expense. By reversing the accrual of say the accountancy fees, when the invoice is processed normally, the accrual will adjust the expense account correctly to take into account any of the fee claimed in a previous period (or not claimed) if the invoice ends up being for a different amount than the original accrual. Of course if the invoice is the same amount the expense total is nil.
-- Edited by YLB-HO on Tuesday 14th of June 2011 12:29:30 AM
Thank you I think I get it now...finally! I have reversed my accrual (debiting £500) so it now has 0 balance and I credited my expense which now says -£500. I don't think further on in this assignment I get an invoice so this will show as an expense in my P&L though.
What happens when you have an accrual at the end of one year and then are told to reverse the accrual at the start of the next year? During the first month of the next year there is no invoice received yet for the accountancy fees. This will mean there is a minus figure for accountancy fees at the end of the month because of the reversal.
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Never buy black socks from a normal shop. They shaft you every time.
Personally I wouldn't reverse the accrual until the appropriate invoice was received. If you reverse it automatically, there's an argument that the liabilities in the balance sheet are understated if the client prepares monthly management accounts.
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Tony
Responses are intended as outline only. Formal advice should be sort from your Institutes Technical Department or a suitably qualified Accountant.
What happens when you have an accrual at the end of one year and then are told to reverse the accrual at the start of the next year? During the first month of the next year there is no invoice received yet for the accountancy fees. This will mean there is a minus figure for accountancy fees at the end of the month because of the reversal.
Do you mean credit? If so then as you are working on the accruals concept, if there have been no accountancy fees within the first month, then the profit and loss should show nil for accountancy fees, in effect you are placing the accrual again for the first month. As ADAS stated, I would not reverse the accrual until the invoice was received. Are you in Practice Peasie?
What happens when you have an accrual at the end of one year and then are told to reverse the accrual at the start of the next year? During the first month of the next year there is no invoice received yet for the accountancy fees. This will mean there is a minus figure for accountancy fees at the end of the month because of the reversal.
Do you mean credit? If so then as you are working on the accruals concept, if there have been no accountancy fees within the first month, then the profit and loss should show nil for accountancy fees, in effect you are placing the accrual again for the first month. As ADAS stated, I would not reverse the accrual until the invoice was received. Are you in Practice Peasie?
I would do as ADAS says as well. Unfortunately it is an assignment question. You have to follow a series of instructions. They are not designed with real life situations in mind.
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Never buy black socks from a normal shop. They shaft you every time.
I have found many bookkeepers/accountants forget to reverse the accrual when the invoice arrives, and the expense is claimed a second time.
If for for example an expense account in credit - does flag up missing invoices or the need to redo accruals. Whereas an credit accrual balance is often ignored for years.
With a larger business with lots of accruals, it is not unusual to put them through at the end of each month and then reverse them on the first day of the month to make sure they are not forgotten until the invoice is processed.
-- Edited by YLB-HO on Sunday 26th of June 2011 10:15:33 PM
