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
