Preparing Business Acc_unt_ U_ing The Accru_l Account_ng Method

by

Kenton Casimaty

Accru_l accounting i_ pr_paring th_ bus_ness accounts using th_ accrual accounting concept, wh_ch is one of the fundam_ntal accounting principl_s. The objective behind a__rual accounting is _mat_hing_, wh_ch is basically ensuring that _ll revenue_ _nd all _xp_nditur_s are recorded in th_ accounting per_od t_ whi_h they r_lat_, i.e. t_ the a__ounting period in whi_h the r_v_nu_ was e_rned _r the expense incurred. It d__sn_t matter if th_ revenue wasn_t _ctu_lly r_c__v_d _n th_ _ccounting per_od, n_r do_s it m_tter if th_ expense w__n_t actually p_id in th_ account_ng period, th_ imp_rtant th_ng i_ to ensure the transaction __ _ompletely and accuratel_ recorded.

Accrued _x__ns_s and pr_paym_nts are th_ m_st __mm_n accounting adjustments t_ make _ure the accounts adhere to ___ru_l accounting re_uirements, and th___ adjustments are b_st ex_lained by way of an exam_le. Let_s suppose a bus_ness has a D_c_mb_r accounting period _nd. In the March _ft_r the a__ounting peri_d end the busin_ss

receives

a w_ter b_ll for $300, whi_h cover_ December, Januar_ and Febru_ry. Since part of the wat_r b_ll relates to our period end the _ccru_l a__ounting principl_s state we need to include a _r___rti_n _f the w_t_r bill _n our accounts. If we do not have a precise amount the only way we can qu_ntify the expen_e is to equall_ a__ortion it, therefore in th__ _cenario w_ will include a $100 accrued expense ($300 x 1/3) by debiting the w_ter r_tes account in th_ pr_fit and l___ a__ount and _rediting the a__rual_ account in the balan__ sheet.

Th_r_ are m_ny different ty_es of ex_en_e_ that will straddle tw_ accounting periods, all of which _r_ tre_ted _n this w_y und_r the accrual account_ng _rinci_les. In additi_n to ex_enses th_t str_ddle two a__ounting period_ _t __ n_t uncommon to receive supplier purchas_ invoices l_t_. You may mak_ many purchas_s dur_ng the per_od to th_ end of D___mb_r, i.e. b_f_r_ the end _f the accounting period, but the supplier m_y not a_tually issue the invoi_e until after th_

accounting

period end. Even th_ugh the inv_ices _r_ received and settled aft_r the end _f the accounting period th_ ex_ense st_ll relates t_ the accounting per_od _nd and under the accrual account_ng _rinci_les th_ _xp_ns_ n__d_ to be rec_rded _n our acc_unting per_od end. In _nother _xam_l_ we w_ll assume the same December accounting _eriod _nd, as above. The business rents _ut a property for $12,000 per annum, whi_h i_ paid qu_rterly _n advance in F_bruary, May, Augu_t _nd N_v_mb_r. The p_yment _n November c_vers November, D___mb_r and Januar_, wh_ch is after _ur accounting per_od end. T_ re_ord th_ entire $3,000 payment would not be in accordanc_ with ___ru_l acc_unting principles sin_e th_ expense for J_nu_r_ relates to th_ n_xt acc_unting per_od. In th__ sc_nario w_ h_ve a prep_yment (i.e. a payment in advanc_) and, under the a__rual accounting principl_s, we need to r_cognis_ this f_ct. Th_ _mount _f th_ pr_paym_nt _s $1,000 ($3,000 x 1/3) _nd is posted to the general l_dg_r by deb_t_ng the prepayment_ account on the balance _heet and crediting the r_nt ex_ense in the profit and lo__ _ccount.

Und_r the accrual accounting concepts there ma_ be other types _f _m_tching_ adjustm_nts such __ pr_viding for deferred and a__ru_d income. D_f_rr_d income __ in_ome relating t_ the n_xt accounting _eriod but is re_eived _n th_ current accounting period, _.e. the customer p_ys _n advan_e or u_front. Und_r th_ accrual a__ounting prin_iples we need to d_bit the in_ome acc_unt _n the _r_fit _nd loss _cc_unt _nd _redit the deferred in_ome _ccount in th_ balance sheet. Accrued income i_ income that rel_tes t_ the current peri_d that is not r_c_iv_d until the following account_ng period. Under th_ accrual accounting pr_nc_ples we have to _dju_t for th__ by d_biting the a__ru_d income account _n the balance sheet and crediting the sales a__ount in th_ _rofit and loss account.

Once the current accounting p_riod h_s been finalised _nd th_ general ledger accounts closed down, the ___ru_l a__ounting c_ncept requires u_ to reverse the adjustments, h_nc_ m_t_hing them t_ th_ c_rr_ct acc_unting period. All _et_ of _ccounts and financial stat_m_nts are r_quir_d to b_ prepared using th_ accrual accounting _on_ept. It do_sn_t matter wh_th_r the accounts are for a s_l_ tr_de, a partnership, a limited liabilit_ partnersh_p, a limited l__b_l_ty compan_ or a _ublic comp_ny _ll statutor_ and published account_ have t_ be prep_red using accrual accounting. A__ounts that are produced for _nternal purposes, such as for manag_m_nt reporting, do n_t have to b_ _r__ar_d using accrual accounting but in the real world even intern_l m_n_gement _ccounts th_t are _nl_ go_ng to be u__d by the business owners are prepared using accrual acc_unting principles. A__ru_l acc_unting _s the standardised and accepted m_th_d _nd that is what _ll organisations us_. M_ny people find th_ accrual accounting _on_ept d_ff__ult to gra_p at f_rst, but _f y_u take a st__ back and th_nk about _t accrual account_ng is logi_al and _t will soon f_ll in to pla_e.

Pr_paring accounts and f_n_nc__l statements using the _ccru_l accounting c_ncepts _s not difficult, however _t will require a bit of thought. In the real world it __ th_ accrual_ accounting concept that _revents accounts and fin_nci_l stat_m_nts being prepared the d_y _ft_r the end of the a__ounting period. B_f_r_ the _ccounting period l_dg_r_ can be closed and the accounts prep_red you need t_ en_ure that _ll inv_ices relating t_ th_ _eriod end have been received. Many suppliers take tw_ t_ three w__k_ t_ ___ue purchase invoice_, so _f the business acquir_d good_ and services close t_ th_ year end the purchase _nvo_ce w_n_t be re_eived until th_ middl_ t_ th_ end of January, th_r_for_ the l_dg_rs cannot be clos_d d_wn until th_ end _f the first month _mmed_ately after the a__ounting p_riod end.

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