Consider again our trader making up accounts annually to 30 June. He moves into the new property on 1 March 2007, as before, but this time let us see what happens if he pays no rent until 15 July 2007. He then pays £1,200 for the year 1 March 2007 - 28 February 2008.
In the year to 30 June 2007 we have no rent payment recorded at all. Clearly however he is not provided with the property free of charge and we should have some rent expense in the profit and loss account.
We will split the payment made in July over the period it covers.
[{m}.{s}a]
We can see that of the 12 months covered by the rent payment, 4 months fall in the accounts year to 30/6/07, the remaining 8 months being in the following year. Thus:
i.e. at 30/6/07 the trader has accrued rent of £400.
The amount of the accrual £400 is added to the total currently in the Rent account, £0, to give the expense for the year £400.
Consider our Rent account for the year to 30 June 2007. We currently have nothing recorded in this account. However we want to record a rent expense of £400. How do we do this? We must debit the Rent account (to increase the expense).
This is double entry - so where do we make the credit? We have no existing account that we can sensibly credit, so we must open a new one - the Accruals (or Accrued expenses) account.
Our adjustment to record the accrual therefore becomes:
2007 Jun 30 | Dr | Cr | |
Rent | 400 | ||
Accruals | 400 | ||
to record closing accrual |
When we clear the Rent account to the profit and loss account it is the figure of £400 that is transferred and appears as an expense.
Note that this is the same figure as we arrived at before i.e. the date of the payment does not matter. What does matter is the rent due for the 4 months, March - June irrespective of when it is paid.
{m}.{s}.4 The Accruals account is a liability account. At the year-end the trader has received a benefit for which he has not paid - he owes 4 months' rent. i.e. this is a liability of his business. The balance in the Accruals account is therefore included in the balance sheet - as a current liability (it is a short-term liability). It is usually entered after Creditors. For example [{m}.{s}e]:
Creditors | 4,320 |
Bank Overdraft | 3,165 |
7,485 |