{m}.{s}.1 Monthly Accounts

Accounts

We have so far looked at accruals and prepayments at the accounting year end. In many organisations monthly management accounts are prepared so that the business can be monitored on a regular basis. In such cases accruals and prepayments will be calculated at the end of each month and entered in the nominal ledger before the monthly accounts are extracted. These figures will be reversed at the start of the next month. If no such entries were made, month-by-month comparisons of expense figures would not be very meaningful.

In our considerations above we have always reversed the opening accruals/prepayments and included the closing ones by journal entry. It will have the same effect if you make one journal entry for the movement in the accruals/prepayments. This might be done in practice, especially if accounts are being prepared monthly.

For clarity however we will continue to make two journal entries - one to reverse the opening figures and one to include the closing figures.

{m}.{s}.2 Computerised systems

Computerised accounting systems are geared towards the production of monthly accounts. To facilitate this most systems have special routines for the entry of accruals and prepayments. In some systems, when they are taken into the next month by running the period-end routine, the accruals and prepayments will be reversed automatically by the system. The user does not have to make the reversing journal entries himself. In other systems prepayments are set up when the payment is made. Each month a defined proportion is transferred from the Prepayments account to the appropriate expense account.

Computer
Cheque

{m}.{s}.3 Accruals- Accounting fees

In the preparation of a set of accounts an accrual that is almost always required is one for the accounting or audit fee.

For example, an accountant prepares the accounts for a client for the year to 30 June 2008. He completes his work in September 2008 and charges his client £950. This charge is an expense of the client's business relating to the year to 30 June 2008. It must therefore be included in the profit and loss account for this year and is, therefore, brought in as an accrual. This is a peculiar case where the work is not done until after 30 June 2008 but the charge is to be included in this year as the work relates to this period. In most cases of accruals something has actually been received by the year end (goods, work done or benefits received). Usually an estimate of the accounting fees will be included as the actual fees will often not be determined until the work is finished (and the work cannot be finished until an accrual is made for the fees!).

{m}.{s}.4 Accruals and prepayments- VAT

Note that we have nowhere mentioned VAT. Adjustment for accruals or prepayments has no effect on VAT. When considering prepayments we are looking at the actual expense recorded in the expense account i.e. the amount net of VAT. It is a proportion of this figure that will be treated as being a prepayment. Any VAT related to the expense will have been dealt with through the VAT account when recording the invoice. When considering accruals we want to establish the accrued amount to be added to the expense figure currently recorded i.e. we need the extra net amount to add to the expense. There will be no VAT liability at this point as no invoice has been received.

Treasure Chest

 

{m}.{s}.5 Accrued income

Income
  Bal b/fxx
  Accrued incomexx
    
    
    

Sundry and prepayments
Accrued incomexx  
    
    
    
    
[{m}.{s}a]

Accruals and prepayments relate principally to expenses. However, it may be necessary sometimes to accrue income. Accrued income will relate principally to sundry income such as rents receivable or interest receivable. Where the balance in an income account does not include all the income earned for the year the balance must be increased by a credit entry - this will be the accrued income (e.g. rental income due for the last few months of the year).

This extra income is due from some kind of debtor. The amounts recorded in the Debtors account (or Trade debtors account as it is sometimes known) relate only to credit sales being invoiced. This debtor is of a different type, so we must record it separately - we will open a Sundry debtors account. We will then debit the amount of accrued income to the Sundry debtors account. As with accruals and prepayments of expenses this entry will be reversed at the start of the following year.

Sundry debtors and prepayments are both assets of similar, but slightly different, nature. Sometimes one account is used for both - Sundry debtors and prepayments. Occasionally where sales have been made but not invoiced for some reason, an adjustment will be made in the Sales account for accrued income. As this amount has not been invoiced, the debit will still be to Sundry debtors.

{m}.{s}.6 Accrued income- example

Step 1

Year end: 31 December
Amount put in bank deposit 1 September: £12,000.
Rate of Interest: 5 %

I2 Interest receivable
    
    
    
    
    
A5 Sundry debtors
    
    
    
    
    
[{m}.{s}b]

 

Step 2

Interest of £150 for the quarter to 30 November was received on that date. This amount has been credited to the Interest receivable account (and debited to the Bank account).

No more interest will be received until the end of the next quarter - the following February. At the end of December therefore one month's interest will be due but not received. This amount has been earned and should therefore be included in the interest figure to be included in the profit and loss account.

I2 Interest receivable
  Nov 30 Bank150
    
    
    
    
A5 Sundry debtors
    
    
    
    
    
[{m}.{s}c]

 

Step 3

We therefore make the adjustment to accrue the interest:

    Dr Cr
Dec 31 Sundry debtors 50  
  Interest receivable   50

The Interest figure to be included in the profit and loss account will now be £200
(4 months @ £50 per month).

I2 Interest receivable
  Nov 30 Bank150
  Dec 31 Accrued int50
    
    
    
A5 Sundry debtors
Dec 31 Accrued int50  
    
    
    
    
[{m}.{s}d]