Here's a better representation... the first one a prepayment... The latter an Accural: You worked out the Utility bills for 2010. which left only £600 for 2011, then you get another bill in January for the last 6 months for £900, as the end of the tax year is only two months away you will have a Liability for Feb, and Mar as there is no bill to put on the accounts. If you know you pay £150 a month for utilities then your ok you know its going to be a £300 liabilty. However if your bills go up or down then you have to estimate the liability for 2011. But you can see how doing it as a diagram helps you see whats going on better.
-- Edited by Shamus on Thursday 27th of September 2012 04:51:25 PM
Hi can anyone please give me working examples of both accruals and prepayments. I think i am getting my head around prepayments (slowly) but accruals are doing my nut in!!! I am both doing this in my studies and now have to apply this to my additional duties at work for i have been now ask to complete management accounts!!!
would love any additional examples or exam questions with answers.
The issue is that income and expenditure should be accounted for in the period that it is used, not the period in which it is paid or received.
A prepayment is paying for something now used over more than one period.
Simple example.
An insurance policy taken out on the 1st of December for a company whose year runs from the 1st of June.
Six months of the insurance policy relate to the current year and should be accounted for there.
Six months of the insurance policy are a prepayment for the following period which is then unwound at the period end to make the prepayment current as being applicable for that year.
Accruals are simply the opposite.
You have taken something in one period that is not paid for until the next so you need to recognise a liability within the current period in order for the financial statements to be a true reflection of the companies position at the end of the period.
An example of an accrual could be accountants fees as when the service is paid for is not the period to which the service relates.
The main thing is that important first point.
expenditure and income MUST be recognised in the period to which it relates.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
I quite often end up pasting these things into paint, saving as a picture and inserting into the post.
On the having to draw pics I do that all the time. Not for this but my desks generally wallpapered with flow charts, structure charts and timelines.
I still find timelines essential to get my head around overlap periods. I know that some people can just read the words and see it in their heads but I like yourself need to see a little diagram on a piece of paper with dates and lines on it.
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
Great minds think alike hey Shamus!! lol didn't see your reply till i posted it! lol (is there anyway i can get it to display bigger....? you can edit my post if you need to :D )
you were so close. the only part that you missed was the insert after attaching the file.
all sorted for you,
kind regards,
Shaun.
__________________
Shaun
Responses are not meant as a substitute for professional advice. Answers are intended as outline only the advice of a qualified professional with access to all relevant information should be sought before acting on any response given.
