Guide to Accruals in Accounting

What are Accruals and Prepayments ?

Accruals and Prepayments are adjustments which Accountants make to the bookkeeping records so that accounting reports make more sense and be more meaningful, particularly for good decision making.

Accruals and Prepayments are used in Management Accounts and Year End Accounts.

Accruals and Prepayments are therefore used to fill a gap in Accounts to help the reader more accurately understand the performance of the business.

Without the proper use of Accruals and Prepayments, Accounts will not conform to the required standards for publication and tax purposes.

Accruals and Prepayments are normally processed through the accounting records by Journals.

Please see our Prepayments page for a more details of prepayments.

Accruals

An Accrual is an adjustment to the Accounts for a cost or expense invoice/bill which has not yet gone into the Accounts in the normal way.

Here are several examples which require Accruals:

• Staff being late in submitting expense claims
• Gas and electricity bills / meter readings up to the year ends
• Deliveries not yet invoiced by the supplier
• Building repair work done but not invoiced
• The accounting bill for the year in question
• Legal and other professional expenses not billed

As long as the work has actually been undertaken before the accounting reporting date, or the work (eg. accountancy) relates to the reporting period, the above Accruals are allowable for Income Tax and Corporation Tax claims.

For example, the business year end is 31st December, and your £200 gas bill arrives a week later dated 4th January with a meter reading dated 30th December. The gas bill would have to be entered by its date 4th January, which means it would not be included as a cost in the previous year where it belongs. This is resolved by accruing the gas bill, which means that the gas bill will be included as a cost and also be allowed as tax relief in the proper year.

These types of adjustment are done by accountants, the Journal is:

Debit    Gas           £200  Profit and Loss Account - Expenses
Credit   Accruals   £200  Balance Sheet - Liabilities

The gas bill is entered into the bookkeeping records dated 4th January, so with the accrual the gas cost is now in both years. Therefore an accrual reversal is required in the second year to cancel out the bill. The journal is:

Debit    Accruals   £200  Balance Sheet - Liabilities
Credit   Gas           £200  Profit and Loss Account - Expenses