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  1. avatar says

    BUt at 7:04 what happens if the ACTUAL amount is lets say 1000 then what do we do? whats the dr and cr

    and what happens if its actually only 800? what is the db and cr?

    thank you

    • Avatar of johnmoffat says

      I do actually explain this later in the lecture.
      There are no additional entries necessary.

      If the accrual at the end of last year turned out to be too high, then it means that the expense last year was too high as well. However we cannot go back and change last year. So this year we carry on exactly as normal and the end result is that the expense in the Statement of profit or loss this year is lower (and effectively corrects the ‘mistake’ last year).

      (In practice it is rarely a problem because by the time the accounts are actually finished we will usually have received the next invoice and so will be able to accrue exactly the correct amount.)

  2. avatar says

    Hi.
    I’m having difficulty with this question. I have the answer but no idea how they arrive at it.. please assist.

    Here is the question.

    A company pays rent quarterly in arrears on 1 January, 1 April, 1 July and 1 October each year. The rent was increased from $90, 000 per year to $120, 000 per year as from 1 October 20×2.

    What rent expense and accrual should be included in the company’s financial statements for the year January 20×3?.

    • Avatar of johnmoffat says

      I am afraid that it is impossible for Andrew’s answer to be correct )the rent only went up to 120000 part way through the year and so the total for the year cannot possible be 120,000!!)

      Our year is 1 Feb to 31 Jan.

      From 1 Feb to 30 Sep (8 months) the rent is 90,000 per year, so for the 8 months it is 8/12 x 90,000.

      From 1 Oct to 31 Jan (4 months) then rent is 120,000 per year, so for the 4 months it is 4/12 x 120,000.

      If you do the arithmetic and then add them up, you should get the total expense for our year to be $100,000.

      As at 31 Jan – the end of our year – the last payment was on 1 Jan (for the previous 3 months) and so there is one month to accrue.

      One months rent at 120,000 per year is an accrual of 10,000.

  3. avatar says

    Hi John,

    With regards to Test Q1, the answer suggests that we should include the interest chargeable on the loan as an asset for the year ending 31.12.08. Isn’t it fair to say that the interest has not yet been realised, and as such, the company has not actually earned any income yet (and so should not be a current asset)?

    OR, do we consider the interest as a Receivable not yet paid (entailing it’s a current asset)?

    Cheers!

    • Avatar of johnmoffat says

      We must always account of all income earned and all expenses incurred, whether or not we have received or paid cash.

      Here, we have earned the interest (because they had the loan for 12 months) and so the income must appear in the Statement of Profit or Loss.
      Since they have not yet paid us the money, the amount owing will appear as a receivable in the Statement of financial position.

  4. avatar says

    When we pay the accrued expense of 950, why don’t we just Dr Accruals & Cr Cash? Why we need to Dr & Cr the telephone expense a/c again, as we have already recorded the expense in the previous year.

    • Avatar of johnmoffat says

      We could, but it would make things more complicated and confusing.

      Let me give you just one example of the problem it would create.
      Suppose our year end is 30 November, and we pay electricity in arrears for 3 months to end Mar, to end June, to end Sept, and to end Dec.

      At 30 November we would need to accrue for 2 months – oct and nov. But the first payment in the next year would be for October, nov, and dec.
      doing it your way we would have to split the payment with part debited to accruals and part debited to electricity.

      Since we only need to worry about accruals and prepayments once a year it is far easier to always debit the payments to the expense account, and at the end of each year to make the entries for the accruals and prepayments.

  5. avatar says

    Total rent received during year ended 30 April 2008: $ 1154880
    Less: Rent received in advance for year ended 30 April 2009: – $ 74880
    Add: Rent for year ended 30 Apr 2008 received as advance
    in year ended 30 Apr 2007 + $ 68880
    Less: Rent for year ended 30 Apr 2007 received in arrears
    in year ended 30 Apr 2008 – $ 50880
    Add: Rent for year ended 30 Apr 2008 which will be received
    in year ended 30 Apr 2009 + $ 44160

    Total Rental income for the year ended 30 Apr 2008 = $ 1142160

    I have assumed that rent to be received in arrears ($ 44160) on 30 Apr 2008 is an income for year ended 30 Apr 2008 in SOPOL and will be a receivable in balance sheet.

    Is this correct?

      • Avatar of johnmoffat says

        The 44160 is recognised as income and aijaz has correctly included it in his calculation of the total income of 1142160.

        Because it is still owing to us, it also appears as a current asset in the Statement of financial position.

        Aijaz is correct.

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