I am currently studying for my AAT Level 4 and have 2 years experience in accounting. I have just started a new job and I have been looking over their accounts.
At the time of writing (March) we are in our 10th month of the year. I see that in the accruals and prepayments there are balances which were carried over from the previous year which was subsequently carried over from the year before and so on. All accruals and prepayments are posted by the accountants who are paid to amend the accounts at the end of every year.
I am unaware of any reason for a balance in prepayments and accruals to last for this long.
From what I have learned, when they were posted in the first place there should have been a plan/document detailing how much needs to come out of prepayments and accruals each month until the balance was removed.
Please can someone help me fill in the gap in my knowledge.
You're not wrong in what you say, but you're too focused on the original transactions that gave rise to the accruals and prepayments. Yes they will expire BUT there'll be new transactions giving rise to the need for new prepayments and accruals to replace the old ones. It's a dynamic thing and maybe the accountants, within materiality bounds, have taken the view that the same level of prepayments and accruals is still appropriate at the respective year ends.
Hope this helps,
-- Edited by Onion4Sage on Wednesday 8th of March 2023 05:16:39 PM
Hi thank you for your response that certainly helps to move my focus.
My follow up question would be for what reason would the same balance be necessary if no new prepayments/accruals have been posted?
Many thanks
Matty
Think of it like this. If I deplete the old balances with "reversal" postings and establish new balances (in the same amount as the original balances) with new postings, the accounting outcome is identical to just leaving the old balances in place. The question would be "what quantum of accruals/prepayment balances is necessary at the relevant balance sheet date?" If it is very little different to the balances sitting on the nominal ledger you can just leave them be as adequate to reflect the current need for such balances. Again, don't think of the balances established as only applicable to the original point in time. They are often processed by reversal and re-establishment but it is equally valid to process only adjusting increments (i.e. the net of the reversal and re-establishment journals). If the adjusting increment is assessed as zero then there's no need to post a zero journal.
HTH.
-- Edited by Onion4Sage on Wednesday 8th of March 2023 05:47:37 PM
Bear in mind that the accountants are probably only interested in materially accurate reporting for the annual accounts. That means that in year reporting will be left to the business itself to manage. It is very easy to see how in year reporting could be unsatisfactory if in year accruals/prepayment levels are not being managed.
