Accruals Prepayments Mark FieldingPritchard mefielding com 1 Principle

Accruals & Prepayments Mark Fielding-Pritchard mefielding. com 1

Principle Sally moves to New York from London. She goes to work by metro. On 1 January 2016 she buys a one year metro/subway/underground ticket paying in cash $1200. The ticket allows unlimited travel all year, 2016, on the metro. When her mother asks how much does it cost to travel on the metro does Sally answer It costs $1200 on 1 January but it is free the rest of the year, or Does she answer $100 a month? 1) Is the cash basis, 2) is the accruals. Accruals basis recognizes expenses when the arise, not when they are incurred mefielding. com 2

Accruals An accrual is an expense we have incurred, but where we have not yet received the invoice ie mobile phone You talk today for 2 hours on 31/12 on your mobile. The bill will come in 1 week. How much is the month end accrual if you pay 10 c a minute? Dr Accrual Telephone Cr 12 Accruals are shown as a current liability in the BS mefielding. com 3

Interactive Question 1 P 234 2002 Cash paid 1060. 55 Accrual 327. 68 Expense 1388. 23 Journal Dr Electric 327. 68 mefielding. com 491. 52 x 2/3 Cr Accruals 327. 68 4

Prepayment A prepayment is an expense we have not yet incurred, but where we have paid in advance You pay in advance your mobile. You pay on 31/12 $100 for January Dr Prepayments Cr 100 Telephone 100 Remember during the year we cash account. Accruals and prepayments are a period end adjustment. When you pay your phone it will, at that time debit the expense account. Prepayments are shown as a current asset in the BS mefielding. com 5

Reversals- Accruals See Interactive Q 1. 1 P 234 2002 Cash paid 1060. 55 Accrual 327. 68 Expense 1388. 23 31/12/02 Dr Electric 327. 68 Reversal 1/1/03 Dr Accrual 327. 68 Cr Expense 327. 68 491. 52 x 2/3 Cr Accruals 327. 68 2003 mefielding. com Opening Accrual (327. 68) Cash paid 2213. 39 Accrual 502. 16 Expense 2387. 87 31/12/03 Dr Electric 502. 16 753. 24 x 2/3 Cr Accruals 502. 16 6

Assume payments made Reversals- Prepayments See Interactive in advance !!! Q 1. 1 P 234 2002 Cash paid 1060. 55 Prepayment (39. 09) Expense 1021. 46 31/12/02 Dr P’pay 39. 09 117. 28 x 1/3 Cr Expense 39. 09 Reversal 1/1/03 Dr Expense 39. 09 Cr P’pay 39. 09 2003 mefielding. com Opening P’pay 39. 09 Cash paid 2213. 39 P’pay (206. 67) Expense 2387. 87 31/12/03 Dr P’pay 206. 67 620 x 1/3 Cr Expense 206. 67 7

Interactive Q 2 P 238 2006 P&L 2006 Cash December 2005 Team (12000) salary 0 8000 2006 Salary 105600 96800 4200 3500 109800 108300 Trainee Team (13200) Op Accrual (8000) Cash paid 108300 Cl Accrual 9500 109800 mefielding. com 8

Interactive Q 3 P 239 @31 August x 4 Rental PP Copy Ac 1400 500 @31 August x 5 Op Accrual (500) Op PP 1400 Cash paid Rental 9000 Cash paid Copy 6350 Cl Accrual 650 Cl PP (1800) 15100 mefielding. com 9

Interactive Q 4 P 241 P&L Sales 156000 Op Inv 10000 Purchases 65000 Carriage In 1000 Cl Inv (13000) (63000) 93000 Distribution (10+2) 12000 Admin (15+3 -1. 5) 16500 Finance (5000) (33500) 59500 mefielding. com 10

Interactive Q 4 P 241 Balance Sheet Assets NCAs 200000 Current Assets Inventory 13000 Receivables 54000 Prepays 1500 Cash 14000 82500 282500 mefielding. com 11

Interactive Q 4 Balance Sheet Liabiities Capital Bal b/f 180000 c/y 59500 239500 Current Liabilities Payables 40000 Accruals 3000 43000 282500 mefielding. com 12

Interactive Q 5 P 241 Admin Expenses Credit purchases 10500 Cash purchases 250 Accrual (100) Ppay 150 10800 mefielding. com 13

Income- Deferred & Accrued Deferred Income- payment received in advance for work we haven’t done yet Accrued income- income due to us but for which no invoice has been raised, bank interest mefielding. com 14

Worked Example P 242 Revenue Dr Deposits Initial Entry Cash 1200 Revenue 1200 31/12 Revenue 1200 Deferred Income 1200 When work done Deferred Income 1200 Revenue 1200 Bonus Receivables 500 (Accrued Income) Revenue 500 Cash 500 Receivables 500 mefielding. com Cr 15