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Hi,
Sorry for the really obvious question, but I thought Accruals were money the entity owes for goods/services already recieved before the end year date, but which have not yet been paid for, and which would not be classed as “trade payables”….ie. all other unpaid expenses other than “trade” goods….eg. so things like utilities, wages etc..
Is this correct, or am I totally off the mark?Reason I’m asking is I’ve just done a practice question and it describes accruals as this:
“invoices recieved before the year end but unpaid at the year-end and relating to goods/services received in the year are included as trade payables,
and invoices received after the year-end that relate to goods/services received in the year are included within accruals balance.”
so implying that the difference between a trade payable and an accrual is whether we’ve received the invoice by the year-end or not…and this has really thrown me.Don’t want to muck this up in the exam if I’ve got the completely wrong end of the stick, so any clarification would be gratefully recieved. Thanks.
Strictly, an accrual relates to anything for which money is owed but which has not been invoiced. If it’s not invoices it is not in the payables ledger so has to be accrued. The amount could be for expenses or purchases. Some people might call an accrual for purchases a ‘purchase reserve’.
On the FS both amounts will be combined into one called ‘Payables and accruals’. In auditing, the particular difficulty with accruals is verifying their completeness: if an invoice is not received and processed by year end, its existence and importance could be overlooked
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Thanks very much for that excellent explanation Gromit…all this time I thought it was just utilities & expenses, when it actually could be any “purchase” as long as it’s not yet been invoiced & gone into the purchases ledger.
You made that really clear to understand. Thanks so much.
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