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Draft accounts show a loss of 1486.
the draft accounts did not include an accrual of 1625 and a prepayment of 834. Accounts were adjusted to reflect the accrual and the prepayment. what was the profit/loss after the inclusion of the adjustments.
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the answer is 2277 loss (1486+1625-834)
——————————-my question is as follows:
when the question says “did not include an accrual of”…to me it means that the entries were not reversed. In other words, when the accrual was created, the entry made was
Dr Exp
Cr Accrualso, inclusion of an accrual wd mean clearing the accrual account by
Dr Accrual
Cr Expwhich implies a decrease in the expenses.
similar argument for prepayments.
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why do i think these are to be reversal entries?
because when we are booking an accrual, we are doing the following entry:
Dr. Exp
Cr. Accrual.so, its IMPOSSIBLE for the expense not have been included in the expense head.
so,, how can anyone forget to include an accrual, when the entry above ensures that the expense has been booked?
or does “not including an accrual” simply means that the accrual entry was never made?
am i making sense??
reagrds
No – you are reading the question wrong.
Not including an accrual simply means that at the end of the year we have forgotten to make an accrual (something that is very common in real life).
We should make the accrual, which will mean a higher expense and therefore a lower profit (or in this case a bigger loss).
ok. so
not making the accrual means the
dr exp
cr accrualentry has not been made.
correct?
Ok….this is clear…. thank u!!
and i have also understood another point:
that in case of accruals not being recorded, the profits will go up, because you have not received the invoices yet bla bla.
and in the case of prepayments, the profits will go down as the expense for the next period have also been recorded in the current period.
correct?
Sort of, but I do not like the way you are wording it.
If an accrual has not been recorded, then the profit will be higher than it should be. The correct profit will be lower once the accrual has been entered.
The other way round for prepayments.
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