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I watched your lecture on prepayment and accrual and i have two questions.
1) Please explain what did you say about how do we know whether it is prepayment or accrual when calaculating them at the year-end.
You said that we should at the last payment but how would we know from it whether it is prepayment or accrual?
2) Why and where do we make reversal entries for prepayment and accrual?
In exam questions there are many ways you can be told about any prepayments and accruals.
In practice (and therefore in some types of exam questions) we look at the last invoice received during the year and see what dates the invoice covers. If the end date on the invoice is before our year end then we need to accrue for the remaining period. If the end date on the invoice is after our year end then we can calculate how much of the invoice is prepaid.
In accruals we estimate the expense for the period because we have not received the bill BUT what happened in prepayment?
Is it true in prepayment we paid the money in advance but we did not sent the bill?
If we sent the bill we have account receivable but if we did not sent the bill we have prepayment?
With prepayments we will have already received and paid the bill. Therefore we know exactly how much has been paid in advance.
Please correct me here.
Question #1
Invoice receive = Prepayment
Invoice not receive = PayableQuestion #2
In prepayment we will have already received and paid the bill.Question #3
In prepayment (we pay in advance):
We used the services AFTER we actually paid for them but we pay them before the year-end – so it is like a receiveable.Question #4
Invoice receive = Receivable
Invoice not receive = AccrualQuestion #5
In accrual we will NOT have received and paid the bill.Question #6
In accruals (we pay later)
We used the services BEFORE we actually paid for them but we pay them after the year-end – so it is like a payable.All correct?
1 If we have received an invoice then there is a prepayment if part or all of the invoice relates to a period after our year end.
If we have not received an invoice there is an accrual if we have used an expense but have not yet had an invoice for it at the year end.2. Yes
3. Yes
4. If we have received an invoice but have not yet paid for it then it is a payable.
If we have not received an invoice but have used the expense then it is an accrual.5. Correct.
6. Correct.
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