I understand the concept of BASIC Accruals and Pre Payments. E.g If we prepare accounts every month, and a telehone bill comes of £300 every month, we DR 100 Telephone and Cr 100 Accrued Expense.
But i get COMPLETELY Lost :( when doing the Month End Reversing Entries :(
Can someone please explain WHY and HOW we do this slowly, step by step. Please
Your original journal would have been for accruals:
Telephone bill for 1 month= 300 (no invoice rec'd)
Dr Telephone 300
Cr Accruals 300
At end end of each month, you reverse that original journal, as you should have had the invoice come through. so say that first journal was for May 14 month end, your invoice for may14 charge comes in and goes through in June 14. You release the accrual, ie not book it again for june as you reconigised the cost in May. but you book the accrual for Junes telephone charge same as above. hope that makes sense.
For the prepayments, you are backing out costs that you have processed that relate to more than 1 month (ie rent). say your invoice for rent comes through in may for a qtr £1500, you cant recognise the 3 months charge in one month, you need to back out 2 months worth via this journal
Dr Prepayments 1000
Cr Rent 1000
Then for the next 2 months just reverse 1 month of the journal
