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Hello, Can someone please explain,
What is Journal Reversing Entries when dealing with Accruals and Prepayments.
I do not understand that part.
Thank You very much
At the end of the year, if we need an accrual because we still owe for an expense, then we Dr the expense account and Cr the accruals account.
That gives the correct total expense, and the correct current liability.However, at the start of the next year, we ‘reverse’ the entry by Dr accruals and Cr the expense.
To see a full explanation and the logic behind it, best is to watch my free lecture on here on Accruals and Prepayments.
Thank You very much.
One last question,
Do you have like a specific video but getting to know/ introduction to Computerised/ Software Accounting?
Secondly
If we Accrue for e.g a old telephone bill. but the bill never comes ( we have switched supplier)
How would you Release the accrual? what would be the double entry?
ThankYou Very much :)!
EDIT: I don’t understand this as well OVER ACCURALS
ABC accounting staff estimates that the amount of its phone bill for the month of April will be $5,500 so it will be
Debit Credit
Telephone expense 5,500
Accrued expenses (liability)
5,500At the beginning of the next month (May), the accounting system generates a reversing entry, which is:
Debit Credit
Accrued expenses (liability)
5,500
Telephone expense
5,500Finally, later in May, the phone company sends ABC the April phone bill in the amount of $4,250. The invoice is reduced because of a combination of a rate decrease and ABC having fewer land lines in use. The entry is:
Debit Credit
Telephone expense 4,250
Accounts payable
4,250Thus, ABC initially creates an accrual of $5,500 that exceeds the actual amount of the expense by $1,250. The over accrual creates $1,250 too much expense in April, and $1,250 too little expense in May.
I understand EVERYTHING except that last line 🙁
In April we thought it would be 5500 , but it was only 3250, SO THE I/S WILL Have HIGHER Expense
BUT ??? HOW does that mean it will be little in May????
The T ACCOUNT Will be
Telephone
———————————————————————-
April 5500 [ I/S 5500
_____ [ ______
5500 [ 5500
[
May 4250 [ Revers Accrual 5500Accrual
———————————————————————————-
April C/f [ Telephone 5500
] bf 5500May 5500 (revers Accr)
??????? I don’t understand thatNo – there is no lecture specifically on computerised accounting. However it is really the same as manual accounting with the exception that (depending on the software) it may keep inventory records as part of the double entry, which manual accounting does not. (This is covered in the chapter in the notes about inventory)
Also, whether computerised or manual, many businesses prepare monthly accounts (as in your later question). Although the accounting itself does not change, this is really management accounting – financial accounting only requires accounting statements once a year. Monthly statements are simply to help management run the business and it is up to them whether or not they prepare them.
With regard to releasing an accrual, this really should never happen. If you use (e.g. telephone) then you owe for it – changing provider does not mean that you do not owe! However, if it did happen then you would debit accruals (to cancel it) and cr the expense account (which would reduce the expense).
More relevant, if the accrual turns out to be the wrong amount, as in your last example. Then in April, I think you are happy that the expense will be too high – you have an expense of 5500 when it really was only 4250.
In May, the accrual is reversed, and so you credit the the expense with 5,500.
When you received the bill, you debit the expense with 4,250. That means there is now a net credit of 1,250.
Suppose you decide to accrue 6,000 in May (because that is what you think the bill will be), then you will debit the expense with 6,000. However since there is already a net credit of 1,250, the amount left to appear in the Statement of profit or loss will only be 6,000 – 1,250 = 4,750. i.e. 1250 too little.I do cover this point in my free lecture on accruals and prepayments. In practice, it is unlikely to be a problem in financial accounts because you will usually have received the bill before the accounts are finalised and can therefore accrue the correct amount. With monthly accounts it certainly does happen because the statements are prepared more quickly – probably before the bill has been received.
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