accruals and prepaids

Forums Leaving Cert Accounting accruals and prepaids

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    • #13164

      hi can anyone tell me how you account for the above in a profit & loss account?

    • #392

      :hi can anyone tell me how you account for the above in a profit & loss account?

    • #13165


      Accruals and prepayments exist in order to get an accurate profit and loss account for the year.

      They are in effect temporary balance sheet items.

      Accruals, in plain english means that you've incurred a telephone bill, say in December 2005(which also happens to be the end of the period for which you're doing accounts), of ˆ200. Now everybody knows that you won't actually get invoiced for this amount till January 2006, so as this was incurred in the previous period but not taken into account, an accrual is created.

      So to bring this into your accounts you:

      Dr Telephone with ˆ200


      Cr Accruals with ˆ200.

      Prepayments are the opposite.

      Rent for example is generally paid in advance. So say on the 1st December you pay 3 months rent in advance, of ˆ300.

      That means that at the year end you're owed 2 months rent, of ˆ200.

      You've to create a prepayment of ˆ200 to show this.

      Dr prepayments with ˆ200


      Cr rent with ˆ200.

      I hope this is of some help to you.

      I've kept it simple so that you could understand but if you need further help let me know.


    • #13166

      Apply a little theory here – One of the fundamental concepts underlying accounts is the MATCHING CONCEPT – this means that we match income and expenditure when looking at the P&L for an accounting period.

      If we have physically paid for something that relates to a period outside our current accounting period then we will take some of the expense and move it to that period i.e. we are doing our accounts to June 30 – but paid 3 months rent (E9,000) on May 1. Three months rent relate to May/June/July – but July is outside the accounting period we are doing – June 30 – this mean that at June 30 Euro 3,000 (1/3 of E9,000) will be prepaid and must be moved out of the current P&L account – Cr Rent (P&L) Dr Prepaid Rent (BS)

      Accrual as previously explained. We post the expense (Dr P&L) and create a creditor for the amount in the BS – since an invoice has not been issued the Cr is shown as an accrual.

      Normally accruals will reflect estimates – i.e. the most usual accraul in a company is for an Audit Fee – the company knows it has to have an audit and will have to pay for it but in general will not know how much the fee will be. The company accountant will put in an estimated expense (Dr P&L) for the fee.

      An Audit Expense in the P&L might look like this

      At the end of 2005 the accounant estimated that the audit fee would be 7,5000 – but actually ended up being 10,000 – the accountant thinks that the audit fee wont be more than this in 2006

      The Audit Fee in the 2006 P&L will be:

      Reverse 2005 Audit Estimate (7,600) – Dr BS Accruals / Cr P&L Audit Fee

      2005 Audit Fee Paid 10,000 – Dr P&L Audit Fee / Cr Cash

      2006 Audit Estimate 10,000 – Dr P&L Audit Fee / Cr BS Accruals

      P&L Amount 12,400


    • #13167

      Cheers lads, great help /

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