FFMA Spring Week 2 Pt. 2 Flashcards
How are administrative expenses recorded when an invoice is received?
Debit the expense account and credit trade payables.
What principle dictates the recognition of expenses?
Accrual accounting: expenses must be recognized when the benefit is received.
How is an expense recorded if the invoice is received after the year-end?
Debit expense and credit accrual (liability).
What is an accrual?
An obligation to pay for goods or services received before the year-end but not yet invoiced or paid for.
How do you record an accrual for a continuous service like electricity?
Debit expense for the service received and credit accrual for the unpaid amount.
How do you reverse an accrual in the new financial year?
Debit accruals and credit the related expense account.
What is a prepayment?
An expense paid for in advance, for services not yet received by year-end.
How do you adjust for a prepayment?
Debit prepayment (asset) and credit the related expense account.
How do you calculate the amount for a prepayment?
Invoice amount divided by the number of months it covers, multiplied by the number of months falling after the year-end.
How do you reverse a prepayment in the new financial year?
Debit the related expense account and credit prepayment.
What key questions help determine if an adjustment is needed?
Which financial year does the expense belong to? When was the benefit received? Is it a prepayment or an accrual?
What is an Accrual?
An accrual is an accounting adjustment used to ensure that expenses and revenues are recorded in the period they are incurred, regardless of when the cash transaction occurs. Accruals are important for adhering to the matching principle in accrual accounting, which states that expenses should be recorded in the same period as the revenues they help to generate.
How is an Accrual Recorded?
When an expense is incurred but not yet paid (or invoiced): - Debit the Expense Account: This records the expense in the period it was incurred. - Credit the Accrual Account: This creates a liability on the balance sheet, representing the obligation to pay in the future.
Example:
Scenario: Bob the Builder completes maintenance work on September 28, 2020. The invoice is received on October 3, 2020, but the company’s year-end is September 30, 2020. Entry on September 30, 2020: - Debit Maintenance Expense: Recognizes the expense in the correct period. - Credit Accruals: Creates a liability indicating the amount owed for the maintenance work.
