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If a supplier has not sent any invoice and it is estimated that the payment will be of $500
The first entry will be DR. expense A/C $500 CR.Accrued expenses A/C $500
Next year first entry will be DR. Accrued A/C $500 CR. Expenses A/c $500Now the supplier sent the invoice worth $525 then the entry will be DR. Expenses $525 CR. Payables $525.
Now in the previous year the accrued expenses were written off as $500 but actual amount to be written off was $525. Now the expense A/C shows $25 debit balance which belongs to previous year but will be written off in current year. It would be wrong to charge $25 more in current year which belongs to previous year. What can be done to correct it?
You have clearly not watched my free lectures on this, because I do explain what happens.
We do not go back and change last years accounts – it is too late. It is effectively corrected in the current year.
In practice, almost always the accrual will be of the correct amount – I explain why in my lectures.
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