Accruals And prepayments double entry

db141414

Hi,
If anyone has any knowledge on the double entry of accruals and prepayments i'd be grateful, I understand the meaning and theory behind both I just need to know if I'm doing this correctly. I've provided 2 examples, with the second example of each (Accrual & Prepayment) being an example with reversing entry.



Thanks for any help

Accruals
1)
Dr Insurance
Cr Accrual

Dr Accrual
Cr Bank

Example with reversing entry:
2)
Dr Insurance
Cr Accrual

Dr Accrual (Being reversing entry)
Cr Insurance

Dr Insurance (When paid during Year)
Cr Bank

Prepayments
3)
Dr Prepayment
Cr Bank

Dr Insurance
Cr Prepayment

4)
Example with reversing entry:

Dr Insurance
Cr Bank

Dr Prepayment
Cr Insurance

Dr Insurance (Releasing Prepayment)
Cr Prepayment

If anyone could critique these examples I'd be thankful!

Thanks again

zygurat789

What are you trying to achieve? Monthly management accounts or annual accounts.
Are you doing theses manually or on a software package? I ask because some packages have automatic reversals.
In 1 above what is the second journal entry for?
2 is ok
The first part of 3 is as for 1 above and the second part should be Dr prepayments not cr.
4 looks ok

In old fashioned practice when journals were hand written it was usual to give a description of what the journal was trying to achieve as you have very briefly done in the brackets

uknick

db141414

I'm not sure if you are trying to account on a cash or accruals basis for your accounts because you seem to have omitted the creditor and debtor stages.

I assume it's not true cash accounting as you wouldn't be looking at accruals and prepayments under this accounting regime.

Accrual:
I apologise if you know this, but an accrual is only used if you have not received an invoice for goods/services you have bought. If you've received an invoice it should go through a creditor account. And then cash/bank when it is paid.

Your example assumes no invoice received at time of "accruing" the insurance as you post it to accruals. The next step would be receipt of invoice, at which time you move the balance from accruals to a creditor account. Then, when the invoice is paid move it from creditor to cash.

A reversing journal for accruals is usually used, at least in my experience, to make you follow the discipline of checking each period to see if the invoice has been received so you can move it to creditors.

Prepayment
Again, if you know this apologies but a prepayment is usually spread throughout the financial periods to which it relates. In your example of insurance paid up front for the year it could be split evenly by month, or any other apportionment which is acceptable to the auditors.

With regard to your journals you seem to have missed out the "debtor" stage as you post straight to bank. If you do pay all by cash then that’s fair enough.

Whilst it is a personal preference I tend to post against prepayment first and then move it to the expenditure account. This makes it easier to show the link on the balance sheet between prepayments and cash/debtors. Your example moves it to expenditure first and then prepayment. Neither way is right or wrong, it’s just that having spent many years reconciling balance sheet accounts I find it easier my way.

Finally, if you're going to use true reversing journals for the prepayment to expenditure movement don’t forget you will need to do it as a cumulative year to date adjustment, not just the monthly amount.

db141414

zygurat789 wrote: »

What are you trying to achieve? Monthly management accounts or annual accounts.
Are you doing theses manually or on a software package? I ask because some packages have automatic reversals.
In 1 above what is the second journal entry for?
2 is ok
The first part of 3 is as for 1 above and the second part should be Dr prepayments not cr.
4 looks ok

In old fashioned practice when journals were hand written it was usual to give a description of what the journal was trying to achieve as you have very briefly done in the brackets

Thanks Zygurat789,

These are for year end accounts, 1 and 3 were examples I found across various websites and 2 and 4 are my interpretations of it as they seem to miss out a step.

As long as 2 and 4 are fine then that's great.