Accounting help - Accruals and prepayments

Need help with understanding accruals and prepayments and showing them on the statement of financial position.

I know that accruals are current liabilities and prepayments are current assets. But I don't understand how to show the double entry of those on the statement of financial position. For instance, let's say £100 of electricity expenses are accrued. Then that would be under current liabilities and also added to the electricity expense in the income statement. But what about the statement of financial position? Surely the increase in current liabilities of £100 will mean that the balance sheet won't balance?

Thanks in advance :smile:

Reply 1

Illusionary

19

Original post by che12345

Need help with understanding accruals and prepayments and showing them on the statement of financial position.

I know that accruals are current liabilities and prepayments are current assets. But I don't understand how to show the double entry of those on the statement of financial position. For instance, let's say £100 of electricity expenses are accrued. Then that would be under current liabilities and also added to the electricity expense in the income statement. But what about the statement of financial position? Surely the increase in current liabilities of £100 will mean that the balance sheet won't balance?

Thanks in advance :smile:

Remember that at the end of the period of account, the profit or loss for the period is transferred to the balance sheet (into the profit and loss reserve/retained earnings), so for an accrued expense the increase in current liabilities is balanced by the reduction in retained earnings.

Reply 2

che12345

OP

Original post by Illusionary

Remember that at the end of the period of account, the profit or loss for the period is transferred to the balance sheet (into the profit and loss reserve/retained earnings), so for an accrued expense the increase in current liabilities is balanced by the reduction in retained earnings.

Ok. Thank you :smile:

Reply 3

bookaholic

Original post by che12345

Need help with understanding accruals and prepayments and showing them on the statement of financial position.

I know that accruals are current liabilities and prepayments are current assets. But I don't understand how to show the double entry of those on the statement of financial position. For instance, let's say £100 of electricity expenses are accrued. Then that would be under current liabilities and also added to the electricity expense in the income statement. But what about the statement of financial position? Surely the increase in current liabilities of £100 will mean that the balance sheet won't balance?

Thanks in advance :smile:

Accruals/Outstanding Expenses: Current Liabilities.
Prepayments: Current assets.

Trial Balance as at...

Electricity Dr. 1100

In the adjustments, they give you that £100 of electricity expenses are accrued. This is how your entry should be.

Profit and Loss Account

Gross Profit. XXXXX

(-) Overheads:
Electricity expenses. 1100
(+) Outstanding. 100
--------
1200

Continue with the problem and arrive at a net profit.
NOTE: If it is a prepayment, you need to subtract from the electricity expenses amount.

Balance Sheet -

Current Liabilities:

Creditors XXXX
Outstanding. 100

This is the two-fold effect for outstanding/accruals. In the case of a prey payment, you need to add the £100 under the Current Assets column. Hope i did not confuse you.

Regards,
Pradeepthi Bommidala.

Accounting help - Accruals and prepayments

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