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Hi
can anyone help me please ? I’m driving myself mad trying to understand this topic and has not been helped by the fact that the answers to questions 1 and 2 are incorrect.In this chapter on question 2, it asks what is the electricity expense at 31/12/13 and what is the accrual or prepayment as at 31/12/13?
I would consider all the options given as incorrect
I work it out as expense 2000 + 450/3 x1 = 2,150.00 – you do not add the expense of the bill not yet received….you accrue for it…….am I correct ?
and
accrual for 600/3 x 2 = 400.00 is correct as the bill did not come in until Mar 14, so it needs to be accrued for in the accounts
so it would seem that none of the answers given are correct.Accrual means that you set up a liability AND recognise an additional expense.
So, at 31/12/2103, we have used 2 months’ electricity but do’t get the invoice until 31/1. We therefore accrue 2/3 of this to estimate what the electrivcity consumed in Nov and Dec is.
So, expense = 450/3 + 2,000 + 2/3 x 600 = 2,550.
The accrual at 31/12/2013 is 2/3 x 600 = 400
So, answer D
OK?
Hi
Thanks for that but I don’t get why you add the expense & accrue for it?
I thought the idea of accruals was because you didn’t have the expense and that is why the accrual is put in and then it is reversed put when the invoice comes in. If you add the expense and accrual, is it not doubling the cost ?
An accrual has two efffects, as does any accounting transaction.
1 It increases the liabilities because we are saying that we owe this money even thouigh we have not got the invoice.
2 It increases the expense because we are recognising that without the accrual the expense is incomplete.
The double entry is
Dr Expense
Cr AccrualIt will be reversed in the next period so that when the invoice is posted you effectively reduce the expense pn that invoice by the amount taken last period.
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