Accruals and Prepayments

This topic has 7 replies, 2 voices, and was last updated 1 year ago by Ken Garrett.

Viewing 8 posts - 1 through 8 (of 8 total)

Author

Posts
July 28, 2021 at 6:58 am #629628
Muhammadi
- Topics: 29
- Replies: 58
Dave Hull is preparing his final accounts for the year to 30 April 20X6. The last payment Dave made for electricity was in March 20X6 when he paid $3270 for the three months to 28 February 20X6.

What adjustment does Dave need to make when preparing his final accounts for the year to 30 April 20X6?

A. A prepayment of $1090

B. An accrual of $1090

C. A prepayment of $2180

D. An accrual of $2180

I could not solve this question.
I think this question is wrong.

Need your help!

Thank you
July 28, 2021 at 11:28 am #629661
Ken Garrett
Keymaster
- Topics: 10
- Replies: 10055
He owes for electricity for March and April, so an accrual is needed.

If his last invoice for three months to end of February was 3270 then an estimate for two months would be 2/3 x 3270 = 2180.
July 28, 2021 at 1:17 pm #629672
Muhammadi
- Topics: 29
- Replies: 58
Ok.
I see.

1. But why is the estimate for accrual
made based upon last invoice?

We could have received several invoices
during the year. Why isn’t the estimate
made based upon those invoices?

2. Do we always make estimations when we try to find the amount of accrued expenses?
July 29, 2021 at 7:38 am #629751
Ken Garrett
Keymaster
- Topics: 10
- Replies: 10055
It is the only information provided in the question….you have to work with that.
July 29, 2021 at 2:44 pm #629790
Muhammadi
- Topics: 29
- Replies: 58
Ok!
Got it.

In practice, do we always make estimations when we try to find the amount of accrued expenses?
July 29, 2021 at 5:45 pm #629798
Ken Garrett
Keymaster
- Topics: 10
- Replies: 10055
In practice it depends on whether or not the invoice is received before the financial statements are issued.

So, if an accrual has to be made for the last two months of the year (Nov and Dec), and the invoice for Nov, Dec and Jan is received on 5 Feb, there is a good chance that it can be used to calculate an accurate accrual. If it isn’t received until 1 March, there is a higher chance the accounts will have been issued and an estimate will have been made for the accrual
August 1, 2021 at 7:39 pm #630072
Muhammadi
- Topics: 29
- Replies: 58
You mean:

If invoice is received sooner in next year, then the issue of financial statements can be suspended until the invoice is received and the accurate amount for accruals is shown.

Or

if the invoice is received in the next year, but too late. Then financial statements will be issued and estimate will be made for accrual.
August 2, 2021 at 9:52 pm #630183
Ken Garrett
Keymaster
- Topics: 10
- Replies: 10055
The second.
Author

Posts

Viewing 8 posts - 1 through 8 (of 8 total)

The topic ‘Accruals and Prepayments’ is closed to new replies.