the accruals concept Flashcards
Accrual principle
Revenue should be recognised when earned regardless of when paid for.
Expenses should be recognised when incurred regardless of when paid for.
Cash basis accounting
Revenue should be recognised when cash is received.
Expenses should be recognised when cash is paid regardless of when paid for.
what are accrued expenses
Accrued expenses are a liability that arises from an expense that has been incurred but has not been paid or invoiced for them before the year’s end.
Examples of expenses that are commonly accrued
Goods received and consumed or sold, for which no supplier invoice has yet been received (e.g. utility bills such electricity, water supply etc.)
Services received, for which no supplier invoice has yet been received (cleaning, transporting based on mileage etc.)
Interest on loans, for which no lender invoice has yet been received;
Taxes incurred, for which no invoice from a government entity has yet been received;
Wages incurred, for which payment to employees has not yet been made.
when does an entity need an accrual?
it has received goods or services and has not paid or been invoiced for them before the year end.
Interest Expense (Finance expenses)
is an expense - the cost of borrowed funds (loans, bonds or other lines of credit).
Its associated costs are shown on the Statement of Profit or Loss.
when do you recognise interest expense?
Recognise interest expense during the period that the entity has the loan.
How do we measure interest expense?
interest expense = interest rate x outstanding loan balance
Prepaid expenses
Prepaid expenses are future expenses that are paid in advance and hence recognized initially as an asset (because they provide a future benefit for the owner).
what are retained expenses made up of?
share capital
share premium
retained earnings
whats the difference between accrued and prepaid expwnses
accrued:
received not paid
dr expenses
cr accrual
prepaid:
paid not received
cr prepayments
dr expenses
why may loans have accrued expense?
as interest fluctuates throughout the year so your using your loan but due to fluctuation expenses may not eb accounted for
Carlson Ltd. rents a delivery van with a rental fee based on the mileage driven during the period, charged at £1.5 per mile and paid in arrears. The estimated mileage for the van is 10,000 miles.
As of December, the actual mileage on the rental van meter is 12,000 miles. Consequently, in January, Carlson Ltd. receives an invoice for £18,000 in rental fees (calculated as 12,000 miles × £1.5 per mile).
Carlson Ltd. is preparing its financial statements for the year ended 31 December.
Calculate the Rental Expense Accrued for December;
Show accounting records during and at the year-end.
1.5 x 10k = 15k estimated
dr expenses 15k cr accruals 15k
18k in rental fees so
dr expenses 18k cr accruals 18k
now we know the exact amount reverse the estimated amount
cr expenses 15k dr accuruals 15k
Wednesday Ltd pays interest on its loan at a fixed rate of 8% on 30 April and 30 October each year.
What entries will be required in the financial statements of Wednesday Ltd for the year ended 31 October 2024 in respect of interest?
£ 000s £ 000s Interest expense 40 Loan 600
interest expense = 8% x 600k = 48k
interest payable = 48k - 40k = 8k
what are accuruals registered as on balance sheet?
current liabilities
Addams Ltd has a bank loan with an outstanding balance of £100,000. Interest is payable on the loan at a fixed rate of 6%.
Interest totalling £4,000 was paid during the year.
6% x 100k = 6k
financial statments: 6k
trial balance: interest expense 4k
dr interest expense 2k
cr intrest payable 2k
statement of finacial position (balance sheet) current liabilities = 2k
statement of profit or loss (income statement) expense = 6k
part of finance expenses
when do we record tax expenses
We always need to make a year end adjustment for the tax expense.
Share capital
the funds raised by a company from issuing shares to shareholders in exchange for ownership rights
contributed capital or Paid-in capital
Share premium
the amount received by the company over and above the par (nominal) value of shares issued
Retained earnings
the cumulative profits of a company that have been reinvested into the business instead of being paid out as dividends to shareholders
Nominal value
(par value)
the fixed value of shares within a company
share capital calc
Nominal value x Number of shares
(par value)
For example, if 10,000 shares are issued at a par value of £2.5 but sold for £3, the accounting entry would be…
Dr Cash A/C £30,000
Cr Share capital A/C £25,000
Cr Share premium A/C £5,000
Companies Act 2006.
Only distributable profits may be paid as dividends.
As defined in Companies Act 2006.
Distributable profits calculation
Accumulated realised profits -Accumulated realised losses - Previous distributions
Principle of capital maintenance
protect shareholders by only allowing companies to pay out ‘real’ profits to its shareholders
dividends process
directors propose dividend
share holders vote
if approve company pays dividend and its recognised when they approve
they can reject
ICAEW Guidance: Tech 02/10
170 pages of guidance on determining distributable profits.
Income is ‘realised’ when ‘qualifying consideration’ is received, eg.
Cash
A promise to pay cash (a receivable)
Release from a liability
Expenses are almost always ‘realised’.
Used to be that retained earnings = distributable profits, but now this is often not the case.
Dividend calculations
pence per share x number of shares in issue
% x nominal value x number of share in issue
are dividends an expense?
Dividends on ordinary shares are NOT an expense
they are a distrubution of profits
Dividends on ordinary shares are NOT recognised in the Statement of Profit or Loss. Instead, they are deducted directly from retained earnings.
what happens when youve paid some divideneds but not the full amount
Interim dividends will have been recorded in the trial balance:
dr interim dividend
cr cash
Subtract this figure from the retained earnings account.
how to account for final dividends
Was the dividend approved before the year’s end?
if no no need for adjustments
if yes then Was the dividend paid before the year end?
if no dr retained earnings cr dividend payables
if yes dr retained earnings cr cash
Ordinary shares
Ordinary shares
Discretionary dividend
Not redeemable
Residual on liquidation
equity
Preference shares
Preference shares
Mandatory dividend
Redeemable
Before ordinary shares on liquidation
liability
