Hello Sir thank you for your lectures, Sir what if there a difference in estimated prepayments and accruals while reversing the entries next accounting period ?
With regards to the last part of lecture what if the estimate was out by significant amount and not by 拢10 or if it has material impact on last year books . What will be the treatment. Please reflect some thought on this, will be quite helpful for practical purpose. Thanks.
In that case there would be a prior year adjustment, as explained in later lectures. However this would be extremely unlikely since usually the actual amount of the invoice will be known before the accounts are finalised.
John, this is probably a silly question but how would we deal with a question that shows an amount for the electricity and water expense combined and we are asked to account for electricity accrued. Do we simply add the accrual?
Sir, since last year (2001) the balance of the telephone expense was 1850 usd in the T account, but this year (2002) you mentioned the balance for the telephone expense from last year is zero when you created the T account for telephone expense. May you explain and thankx in advance for your reply.
Sir, i think i have found the answer. We need to “close off the t account”. Credit the telephone and debit the statement of profit and loss, thus leave the balance of the telephone “zero”.
Thank you for your video, right at the end you said if we had received the bill, we know the exact amount for the expense. This is still an accrual because we have not paid the invoice, is that correct? Is it correct to say not all accruals are estimates? Thanks!
It would indeed be a good revision for beginners. Hope you do consider including it in the future !
shakir7385says
Hi Sir,
Thank you for your free lectures. Indeed we all are benefiting from it. I have one short query regarding the telephone expense of 950 which relates to previous year. Since we already booked this 950 in previous year expense and also created accrual account with the same amount. So in subsequent year, why can’t we just Debit the accrual with 950 and credit cash with 950. Why we are required to reverse the accrual.
Although the end result will indeed be the same, it is the accountant who will deal with the year end adjustments including accruals. The bookkeeper records the day-to-day transactions and is taught that when paying electricity we credit cash and debit the expense account.
1. Prepayment is the money we paid advance 2. Accruals is the money we haven’t paid 3. Everything just remain unchanged if the actual bills is more than the estimation last year , because balance of this year act as a auto correction for the last year .
Good day sir, So i was practicing some questions regarding accruals and prepaymente from Kaplan and i cam accross the question and i dont understand how they got this answer and i was wondering if you can assist me with this.
Question is as follows: On the first day of month 1, a business had prepaid insurance of $10,000.00. On the first day of month 8, it paid in full, the annual insurance invoice of $36,000.00 to cover the following year.
The amount charged in the statement of profit or loss and the amount shown in the statement of financial positon at the year end is:
The answers given were as follows: A. $5000 $24000 B. $22,000 $23,000 C. $25,000 $21,000 D. $36,000 $15,000
For this example, while creating my T Account, I initially went ahead to DR accrual 950 and CR cash 950 straightaway (since it was an expense for last year and the bill was used last year) instead of DR accrual 950, CR telephone acct 950 then DR telephone 950 and CR cash 950. Although we both arrived at the same SOPL expense and accrual, there was a noticeable difference in our T Accounts as my total sum was 3550 while yours was 4500. I’ll kindly like to know if my T Account layout is also correct or if I should correct myself based on your layout
You can do what you suggest – no problem. The end result is the same and that is all that matters. Appreciate however that although you must understand double entry for the exam, you cannot be asked to actually write-up any t-accounts.
Hi, thanks for providing these lectures, I’m finding them excellent. The explanations are very clear. I want to know how accruals and prepayments are treated on an income a/c such as Rental Income from property. There are some questions relating to this in the Kaplan revision kit but I don’t see it covered here.
Accrual increases balance of account as it relates to current year while prepayments should be deducted as they related to future period.
Only thing since income has credit balance you need to credit income (SOPL)and debit accrued income (will be reflected in SOFP as current asset).
And reverse for prepayments it will be considered as liability in SOFP and rental income will be reduced by debiting it as it income received in advance. Something not related to current year.
Thank you for providing the answer. However please do not do it in general because this area is for comments on the lectures. Students should be encouraged to ask any questions in the Ask the Tutor Forums where they will receive a reply within 24 hours, or in the other Forum for each paper (and please do help people in the non-Ask the Tutor Forum 馃檪 )
Hi So if we under estimated the accruals the difference goes to next years accounts eg 拢10 expense in your video. What if it was other way around we estimated too high? The actual bill was 拢940 instead of out estimate ? Would 拢10 go in other incomes after gross profit ?
Have a good day, sir. I have a question that if the Prepayments or Accruals guessed last year have a terrible deviation from the true number. As you said in the last part of the video, accounts can change the guessed number in the next year to correct the deviation. Is it legal? Thanks for your answer.
The treatment is certainly legal. (Why should the deviation contain illegal things – obviously if the company has done something illegal then that is wrong, but is nothing to do with accounting?)
lasttridesays
Hello, I am student at University of Surrey. I am writing in order to express my overwhelming happiness that I found Opentuition.com It is really a game-changer for me in my studies on Financial Accounting. John Moffitt truly is a legend! I am watching every lecture with pleasure. He describes everything so understandably and clearly that sometimes I just smile while listening to him. I wish I had a lecturer like him! Best regards.
C1997 says
Hello sir, great lecture there ?
I wanted to find out on which side of the statement of financial position are accruals and prepayments recorded?
John Moffat says
There are no sides 馃檪
Accruals are shown as current liabilities and prepayments are shown as current assets.
Have you not watched the earlier lectures? They should be watched in chapter order 馃檪
MOHDSHAZEEB says
Hello Sir thank you for your lectures, Sir what if there a difference in estimated prepayments and accruals while reversing the entries next accounting period ?
praveenmasih says
With regards to the last part of lecture what if the estimate was out by significant amount and not by 拢10 or if it has material impact on last year books . What will be the treatment. Please reflect some thought on this, will be quite helpful for practical purpose.
Thanks.
John Moffat says
In that case there would be a prior year adjustment, as explained in later lectures. However this would be extremely unlikely since usually the actual amount of the invoice will be known before the accounts are finalised.
praveenmasih says
Thank you John for you instant and clear reply Appreciate it!
John Moffat says
You are welcome 馃檪
guyver101 says
How do we deal with the issue where the actual invoice is different to the accrual estimate? Lets say it was 拢1000 (rather than 950).
Is the 50 extra accounted for in the current year, and the accruals 950 dealt with as per the lecture?
Many thanks
guyver101 says
Sorry, please ignore. You did cover this-my apologies
Joanne94 says
John, this is probably a silly question but how would we deal with a question that shows an amount for the electricity and water expense combined and we are asked to account for electricity accrued. Do we simply add the accrual?
Thank you.
John Moffat says
Without seeing the exact question that I guess you are referring to, from what you have typed the answer is ‘yes’ you would just add the accrual 馃檪
AbrahamChinYuan says
Sir, since last year (2001) the balance of the telephone expense was 1850 usd in the T account, but this year (2002) you mentioned the balance for the telephone expense from last year is zero when you created the T account for telephone expense. May you explain and thankx in advance for your reply.
AbrahamChinYuan says
Sir, i think i have found the answer. We need to “close off the t account”. Credit the telephone and debit the statement of profit and loss, thus leave the balance of the telephone “zero”.
John Moffat says
That is correct 馃檪
Nyasha27 says
Thanks ?
saddamalili says
Thanks a lot!!!
John Moffat says
You are welcome 馃檪
Anthonia says
Another great lecture! Thanks so much! I wish I had started using these lectures last year; so helpful! Thank you John!
John Moffat says
Thank you for your comment 馃檪
Ocean2k20 says
Thank you for your video, right at the end you said if we had received the bill, we know the exact amount for the expense. This is still an accrual because we have not paid the invoice, is that correct? Is it correct to say not all accruals are estimates?
Thanks!
John Moffat says
That is correct. If we know the exact amount then we use it. If not then we estimate.
Asif110 says
Hello Sir, in the lectures do you cover Accrual Income and Prepayment Income and their double entry with Income Ledger Accounts, instead of Expense ?
John Moffat says
No, because the logic is exactly the same (and, of course, the actual double entries are not needed for the exam).
Asif110 says
It would indeed be a good revision for beginners.
Hope you do consider including it in the future !
shakir7385 says
Hi Sir,
Thank you for your free lectures. Indeed we all are benefiting from it.
I have one short query regarding the telephone expense of 950 which relates to previous year. Since we already booked this 950 in previous year expense and also created accrual account with the same amount. So in subsequent year, why can’t we just Debit the accrual with 950 and credit cash with 950. Why we are required to reverse the accrual.
Best Regards,
Shakir
John Moffat says
Although the end result will indeed be the same, it is the accountant who will deal with the year end adjustments including accruals. The bookkeeper records the day-to-day transactions and is taught that when paying electricity we credit cash and debit the expense account.
shakir7385 says
Thank you John.
John Moffat says
You are welcome 馃檪
tkhue3296 says
Key concepts i got :
1. Prepayment is the money we paid advance
2. Accruals is the money we haven’t paid
3. Everything just remain unchanged if the actual bills is more than the estimation last year ,
because balance of this year act as a auto correction for the last year .
Thanks John .
John Moffat says
Thank you for your comment 馃檪
zaynahmohammed24 says
Good day sir,
So i was practicing some questions regarding accruals and prepaymente from Kaplan and i cam accross the question and i dont understand how they got this answer and i was wondering if you can assist me with this.
Question is as follows:
On the first day of month 1, a business had prepaid insurance of $10,000.00. On the first day of month 8, it paid in full, the annual insurance invoice of $36,000.00 to cover the following year.
The amount charged in the statement of profit or loss and the amount shown in the statement of financial positon at the year end is:
The answers given were as follows:
A. $5000 $24000
B. $22,000 $23,000
C. $25,000 $21,000
D. $36,000 $15,000
Any form of help would be greatly appriciated.
John Moffat says
Please ask this kind of question in the Ask the Tutor Forum and not as a comment on a lecture.
nichoku says
Good evening sir,
For this example, while creating my T Account, I initially went ahead to DR accrual 950 and CR cash 950 straightaway (since it was an expense for last year and the bill was used last year) instead of DR accrual 950, CR telephone acct 950 then DR telephone 950 and CR cash 950. Although we both arrived at the same SOPL expense and accrual, there was a noticeable difference in our T Accounts as my total sum was 3550 while yours was 4500.
I’ll kindly like to know if my T Account layout is also correct or if I should correct myself based on your layout
Thank you so much for this platform
John Moffat says
You can do what you suggest – no problem. The end result is the same and that is all that matters.
Appreciate however that although you must understand double entry for the exam, you cannot be asked to actually write-up any t-accounts.
surajnagesh says
Hi sir, in the video @3:50 you said and i quote “i want the expense for this year and the 4500 included. That payment for three months of last year”.
I went through the entire lecture video, all 4 parts, understood everything except this one quote.
Could you please go through that part of the video and help me understand what you mean.
Thanks and kind regards.
Evie2468 says
Hi, thanks for providing these lectures, I’m finding them excellent. The explanations are very clear.
I want to know how accruals and prepayments are treated on an income a/c such as Rental Income from property. There are some questions relating to this in the Kaplan revision kit but I don’t see it covered here.
deviant88 says
Same way as it is applied for expenses.
Accrual increases balance of account as it relates to current year while prepayments should be deducted as they related to future period.
Only thing since income has credit balance you need to credit income (SOPL)and debit accrued income (will be reflected in SOFP as current asset).
And reverse for prepayments it will be considered as liability in SOFP and rental income will be reduced by debiting it as it income received in advance. Something not related to current year.
John Moffat says
Thank you for providing the answer. However please do not do it in general because this area is for comments on the lectures. Students should be encouraged to ask any questions in the Ask the Tutor Forums where they will receive a reply within 24 hours, or in the other Forum for each paper (and please do help people in the non-Ask the Tutor Forum 馃檪 )
deviant88 says
As you say, Sir. I won’t henceforth. I do agree these questions need to be asked in forum.?
John Moffat says
Thanks a lot 馃檪
skhan10 says
Hi
So if we under estimated the accruals the difference goes to next years accounts eg 拢10 expense in your video.
What if it was other way around we estimated too high? The actual bill was 拢940 instead of out estimate ? Would 拢10 go in other incomes after gross profit ?
John Moffat says
No – it would be treated in exactly the same way but in reverse. It would simply mean that the expense this year would be $10 lower.
damulirahenry says
Thanks sir. Do prepayments exist in both the S.O.P.L & S.O.F.P or?
tayyab12323 says
They only exixt in sofp
John Moffat says
Correct (although they do need adjusting for to get the total expense in the SOPL)
abc528 says
Have a good day, sir. I have a question that if the Prepayments or Accruals guessed last year have a terrible deviation from the true number. As you said in the last part of the video, accounts can change the guessed number in the next year to correct the deviation. Is it legal? Thanks for your answer.
abc528 says
I mean that the deviation maybe contains illegal things….
John Moffat says
The treatment is certainly legal. (Why should the deviation contain illegal things – obviously if the company has done something illegal then that is wrong, but is nothing to do with accounting?)
lasttride says
Hello,
I am student at University of Surrey.
I am writing in order to express my overwhelming happiness that I found Opentuition.com
It is really a game-changer for me in my studies on Financial Accounting.
John Moffitt truly is a legend! I am watching every lecture with pleasure. He describes everything so understandably and clearly that sometimes I just smile while listening to him.
I wish I had a lecturer like him!
Best regards.
John Moffat says
Thank you very much for your comment 馃檪
kingkongsajang says
good thing I didnt apply to surrey haha