Accruals and Provisions Flashcards
What is an Accrual?
Accruals are estimates of amounts of money the business owes, shown under current liabilities on a balance sheet
When does an Accrual arise in accounting?
An accrual arises when goods or services are received during the current financial period but the invoice / bill does not arrive until the next financial period. The accrued amount will be included in the current year’s accounts as an accrual but may have to be estimated.
What is an example of an Accrual?
Utility bills such as gas and electricity, telephone and water, which are billed in arrears.
How can you estimate a future bills and reflect this as an accrual in a balance sheet?
If you have not yet received the bill, you could base the accrual figure on a past bill for the same period.
At the end of a financial year (April) a company has used electricity that it has not yet been billed for. The bill covers February, March and April but isn’t due until early next month (May), which is the start of a new financial year. This means that the period of the bill covers two financial years. How would this be reflected and calculated in the accounts?
The accrual in the accounts will relate to the usage only in the current financial year, which is 2 months.
If the total amount of the bill is £330, the accrual amount is £220 calculated as:
£330 divided by 3 (months) to give the monthly amount = £110.
£110 x 2 (months currently used) = £220.
What is the Accruals Concept/Matching Concept?
This concept states that income and expenses should be recorded for the financial period to which they relate, rather than when the cash is actually received or paid.
What does GAAP stand for?
Generally Accepted Account Practice
What does IAS stand for?
International Accounting Standards
What does IFRS stand for?
International Financial Reporting Standards
What does SSAP stand for?
Statements of Standard Accounting Practice
What is a provision?
A provision is an amount of money set aside for a debt that is expected in the next financial year. Provisions are for situations where the timing and or the amount of the future expense is uncertain, so the amount has to be estimated. Accruals may also have to be estimated but with provisions there is a greater degree of uncertainty).
List an example of a provision?
Legal Costs / Compensation
Cost of warranty repairs or possible replacement
Cost of repairs.
Where on a balance sheet can Provisions be found?
Under the liabilities section
