4. Accounting for Accruals and Prepayments Flashcards
What is the double entry to record an accrual and a prepayment?
Accrual:
Debit - Expenses
Credit - Accruals
Prepayment
Debit - Prepayments
Credit - Expenses
Where are prepayments included in the statement of financial position?
Prepayments are included in current assets in the statement of financial position as they represent goods or services that the business is owed in respect of expenses that have been paid in he year but relate to future accounting periods. They usually clear within 12 months of the date of the statement of financial position. The balance on the prepayment ledger account is brought down as debit balance at the beginning of the next period.
Where are accruals included in the statement of financial position?
Accruals are included in current liabilities as they represent expenses which have been incurred but for which no invoice has yet been received. They nearly always clear soon after the end of the reporting period. The balance on the accruals account is brought down as a credit balance at the beginning of the next period.
Why must accruals and prepayments be reversed? How is this done?
Prepayments and accruals must be reversed by an opening journal in the new period, otherwise the entity will charge itself twice for the same expense (accruals) or will never charge itself (prepayments)
What are the journal entries for reversing accruals and prepayments?
Reverse accrual:
Debit - Accrual (opening credit balance on liability account)
Credit - Expense (new period)
Reverse prepayment:
Debit - Expense (new period)
Credit - Prepayment (opening debit balance on asset account)
What is the balance on the accruals and prepayment accounts once the journal entries for reversing them are processed?
Once these opening journals are processed, the balance on the accruals and prepayments accounts will be zero. They will not be used again until the end of the new period.
