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Hi Cara-Louise,
Accruals and prepayment reversals can get very tricky at times.
Lets start with the principals. Accruals are those expenses that have incurred but not yet paid for. So we will show then in Profit and Loss account as an Expense first, then post the same amount to Balance Sheet. Why post in expenses a/c first? because its an expense incurred for that particular year of accounts so that years profit has to be deducted by that expense. Else profit will be overstated.
Second entry as said above, goes to Balance sheet in the Current Liability, as Accrual. As we know, accruals are those expenses that have been shown in Expenses a/c but are not paid for. So they have to be paid in the following months or even after end of year.
We always first create the accrual, then we pay them off later.
Accounting Entries
1. Creating an accrual in the first year or period:
Dr. Accountancy Fee Expense a/c (P & L) £500.00
Cr. Accruals A/c (Balance Sheet) £500.00
2. Payment of Accrued Expense in 2nd year or period
Dr. Accruals A/c (Balance sheet) £500.00
Cr. Bank or Cash A/c (Balance sheet) £500.00
This is what you posted means, the amount to clear accruals must match what was previously shown in accounts. As you can see above, £500.00 has been shown in P&L accounts and same amount has been cleared upon payment.
We now come to the issue of differences arising when clearing the accruals which is the main confusion you are having with.
Taking your example, Accruals a/c has £4000.00. and only £3200.00 has been charged and paid.
Based on the entry 2 above, when you are paying the accrual, we are assuming that entry 1 has been made already and hence accruals a/c having a balance in the account. Hence entry to accruals only happens AFTER the DEBIT entry has been passed to the respective expenses a/c. If there is no expenses to accrue, no amount will need to be accrued as well in accruals a/c.
However, sometimes, differences arises. £3200 amount is being paid and cleared from accruals a/c but accruals shows £4000.....hmm whats going on? By clearing the 3200 from the 4000...we are left with a Credit amount of 800 with no possible explanations. Here is what we can assume then....maybe somebody has missed the debit entry in accountancy a/c for 800 and hence we now need to do the missed entry....otherwise upon payment of accruals, the accruals would have become NIL. It hasn't as of now, so it needs a correcting entry. No entry goes to accruals without going to expenses (p&l) a/c....so if accruals is showing an entry, then either accruals has been overstated or a missed debit entry in accountancy a/c as in your case.
we have so far:
CR Accruals 800 but no Dr entry...
So we will follow the pattern.
1. Creating an accrual:
Dr. Accountancy Fee Expense a/c (P & L) £800.00
Cr. Accruals A/c (Balance Sheet) xxx
Since we already have Credit balance of 800.00 left in the accruals a/c after payment done of 3200, we dont need to do the second entry of 800.00 to accruals again.
So the 800.00 will go to the Debit side of accountancy a/c only. and this will then balance out the debits and credits.
Next period, they will pass the second entry of when they make the payment:
2. Payment of Accrued Expense
Dr. Accruals A/c (Balance sheet) £800.00
Cr. Bank or Cash A/c (Balance sheet) £800.00
Now i will answer your questions:
If the difference has to be recorded in the accountancy account. Are there any entries in there already? (Assume this is end of first year)
Ans: Based on your scenario, it does not appear to have any entries and hence the 800.00 entry to balance out the accruals a/c. However first year will not have any accruals to be paid off if we assume this is the year we are creating the accruals to begin with. Accruals are cleared or paid in the 2nd year or period. eg Accruals created in year ended 31.12.2024 will be paid in year 2025.
if for example the accrual was 4000 but only 3200 was charged (ignore vat) where is the invoice posted? if only 3200 was paid what/where is the double entry?
Ans: we are assuming 3200 was already posted before with the Entry no 1 format as shown above in the prior year. SO now the 2nd entry is being passed to clear the accruals.
If there is no entries in the accountancy account at this point why would the 800 difference just go in there? If it does which side?
Ans: 800.00 will go to debit side of accountancy a/c as explained above. as we are increasing the expense a/c. remember DEADCLIC
Hope it helps.
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