Accruals and prepayment help please - The Book-keepers Forum (UK)

Low1 · Member

Accruals and prepayment help please

Artois · Guru

Low1 wrote:
Hi everyone, I haven't done accruals and prepayments for a long time and I can't quite remember how it goes - any help appreciated.
I have an insurance invoice for this year, i have entered it as normal.
I then need to do a journal dr prepayments cr insurance
then when payment is receive cr prepayments dr insurance?
How do I account for the payment into the bank would it be recorded as a prepayment?

Electricity accrual - for owed, enter invoice as normal then cr accruals dr electricity? Im sure this isnt correct!
Then when a payment is made record the bank payment as an accrual nominal code and journal dr accruals cr electricity?

Hi, we always ask newcomers for a bit of an introduction first

Usual stuff - what prof body do you belong to, do you work for yourself or in a practice/ firm, are you a bookkeeper or accountant, what qualifications, how long in role, where up to in your studies-what exams passed/with what body/in midst of doing, where based, what you did before this role? That sort of thing. Helps get to know you but also how best to pitch answers.

A bit confusing, you ask about a prepayment for insurance and then say about receiving the payment into your bank, is it not you making the advance payment?

Low1 · Member

Hi Doug, sorry I am at the end of my AAT level 4 (2 exams to go) and work as a bookkeeper. I have had some (limited experience) in an accountants, but predominantly as a bookkeeper for approx 4 years. I have done accruals and prepayments but my mind has gone blank as I haven't done them for a while!

Sorry if I wasn't clear enough I will try to elaborate, I have taken out business insurance and have received the invoice, we will be paying a direct debit each month, sorry it should have said the payment from our bank!
I have entered the invoice as normal but I'm sure I need to do a journal entry to put it into prepayments, I just can't remember the entire journal process. I know each month I need to take a payment out of prepayments back into insurance. I was wondering if someone could clarify the journals for me please and also explain do I mark the direct debit each month as going to prepayments instead of insurance? Any help is gratefully received.

Artois · Guru

Hi Lowenna

How have you entered the Invoice? Others may disagree but if you have it as a supplier (Insurance) then when your monthly DD payments go through just allocate the payments to the supplier and then you or your accountant can do any necessary adjustments for prepayments at the year end.

Cheshire · Master Book-keeper

Hi Lowenna
Please add your name so that it appears under the signature bar on all posts, saves having to look it up each time.

So which two exams have you got left? Who is your licence/ML with at the moment? Whereabouts are you based?

I would agree with Doug, although as a fully fledged member once you pass your exams you will be needing to know.

Are you producing monthly managements for your own business? If not - you dont need to bother doing monthly.

One other thing to know is that electricity bills will maybe have an element of prepayment as well as accrual - does yours? Are you renting an office? Plus insurance if paid by D/d is usually over 10 months whereas the policy is over 12 - is yours?

Low1 · Member

Hi Joanne,

I will add a signature, I'm taking Ptax in just over a week and then credit management.

Yes the the insurance is for 12 months but there are payments scheduled for 10. I'm not producing management accounts, in my old job electricity, insurance and c/tax were all allocated to accruals and prepayments but as I haven't done it for a while I can't remember the exact way!

thanks for your help.

Kind regards

Cheshire · Master Book-keeper

Hi Lowena
Not sure if you saw Doug's response as you didnt respond to him.

Is this an example for the exams?

Good luck with the PTax one this week. Who are you training with?

Just a hint on the accruals (sorry Im a firm believer in making students work for it wink , as its the best way to learn) - ignore the Bank processing, its got nothing to do with it.

Think about what you are trying to do and why (the matching principle!).

Do as Doug suggests and treat the accrual/prepayment separately.

Have a go, post on here and we can let you know. Doesnt matter if you go wrong as at least then you have tried.

Does that help or do you need a blow by blow example?

Low1 · Member

Hi Doug, thanks for the advice, I will do just that :) . Kind Regards

Low1 · Member

Hi Joanne, thank you for your advice. Ptax was yesterday and synoptic results were out last week (I passed phew), I'm studying at a local college. I have done what Doug suggested. Kind Regards Lowenna

matt123 · Senior Member

2 sides of the transaction. First is to post the amount in the supplier account. Let's call it Â£1200 insurance. CR Supplier Â£1200 DR Prepayments Â£1200 Say you make 10 monthly payments then it would be ; CR Bank Account Â£120 DR Supplier Â£120 Which will correctly reduce the amount owed to the supplier. Then, to correctly match the expense to each monthly equally you would do another monthly journal; CR Prepayments DR Insurance Expense The easiest way to understand prepayments is to question why it's done. If you posted Â£1200 to one month you would have a huge insurance expense in that month and Â£0 expense for the other months. As the other insurance is for 12 months it has to be allocated equally over the period it covers.

matt123 · Senior Member

I did post spaces in that and had it laid out lovely!