Accounting Lecture 6

• Accruals


  Recorded to make sure that the expense incurred in the period (but not yet invoiced) is taken into account in the calculation of profit
• Illustration


  • The business may reach the accounting period end without receiving an invoice for an expense which has been incurred. As a consequence, there is no formal obligation to pay and a payable cannot be recorded.
• Payables (creditors)


  The amount owed by a firm for unpaid invoice
• Accruals


  The amount of expenses owed by a firm without an invoice
• The role of estimates

  • In some cases, the value of goods or services received before year end (but not invoiced until after year end) will be known. In these cases the accrual can be made for that amount
  • In other cases, the value may not be precisely known until the invoice is received. Thus, an estimate of the amount relating to the relevant year has to be made
  • For example, in the illustration above need to accrue 2 months expenses. This may be based on rate of expense in previous invoice paid, but be aware of seasonal fluctuations
• Prepayments


  The business may have paid in the current accounting period for goods or services that will be received in the next accounting period. Prepayments are recorded to make sure that the expense is taken into account in the calculation of profit in the period when it has been incurred (when the goods or services are received)