Contents:
8 - Accruals & Prepayments
Accountancy is based upon the accruals concept - that is expenses & sales are recognised as they are earned (in the period they relate to), rather than when cash changes hand.
As a result, we must make adjustments for invoices received near the year-end which relate to the previous or next period
Accruals
We must accrue for expenses which are invoiced after the year-end, but relate to the current year.
For example, a telephone bill received one month after the year-end, which charges for the previous 3 months. Here, we must accrue for 2/3 of the total. This brings 2/3 of the bill into this year.
Distinguish this from a creditor, which has been invoiced before the year-end, but remains unpaid at the year-end date.
The double-entry for accruals will be dealt with in the year-end adjustments.
Prepayments
These are the opposite of accruals - where an invoice has been received before the year-end which relates in whole or in part to the next period.
For example, rates paid 6 monthly - paid 1 month before the year-end, but 5/6 of the the total relates to the next period. We must set up a prepayment for 5/6 of that bill to defer it until the next period.
The double-entry for prepayments will be dealt with in the year-end adjustments.
Income
The above deals only with expenses. The same situation can occur (less commonly) with sales income.
Income received in advance (income in advance) needs to be deferred until the next period.
Income earned but not yet invoiced (accrued income) needs to be brought forward into the current period.
The next section will look at fixed assets.