A__ru_l accounting _s preparing th_ bu_ine__ accounts using th_ accrual acc_unting concept, wh__h _s one of the fundam_ntal accounting principle_. The _bjective beh_nd _ccru_l accounting __ ‘m_tching’, which _s basically ensuring that _ll r_v_nu_s _nd _ll ex_enditures are recorded in th_ accounting period t_ wh__h th_y r_l_t_, i.e. to the account_ng period in wh_ch the revenue was earned or the expense incurred. It do_sn’t matter if the revenue w__n’t _ctu_lly r_c_iv_d in th_ account_ng period, n_r d_es it m_tter if the _xp_n__ wasn’t actually _aid in th_ account_ng peri_d, the import_nt thing _s to ensure the transaction __ compl_t_ly _nd _ccur_tely recorded.
Accrued _xp_ns_s and prep_yments _re th_ mo_t c_mm_n accounting adjustments t_ make _ur_ the accounts _dhere to _ccru_l accounting re_uirements, _nd these adjustments are b__t ex_lained b_ way of an example. Let’s suppose a business has a December accounting period end. In the Mar_h after the accounting peri_d end the busin_ss receive_ a w_ter b_ll f_r $300, whi_h covers December, J_nu_ry _nd F_bruar_. Sinc_ part of th_ w_ter b_ll relates to our period end the a__rual account_ng principles state we need to include a proport_on _f the w_ter bill in our accounts. If we d_ not h_v_ a precise amount the _nl_ way w_ can quantif_ the expense is to equ_lly apportion it, therefore in th_s scenar_o we w_ll include a $100 accrued expense ($300 x 1/3) b_ debiting the w_t_r rat__ account in th_ prof_t and l_ss account and cred_t_ng th_ a__ruals account in th_ b_l_nce sheet.
Th_r_ are many different ty_es _f expenses that w_ll straddle tw_ accounting peri_ds, _ll of which ar_ tr_at_d in this way under the accrual a__ounting principles. In _ddition to _xp_n___ that _tr_ddle two account_ng period_ _t _s n_t uncommon to receive suppli_r purchas_ invoices l_t_. Y_u may m_ke many purchas_s dur_ng the p_riod to the end of D_c_mb_r, i.e. before the end _f the accounting period, but the supplier m__ not _ctu_lly issue th_ invoi_e unt_l after th_ accounting period end. Even th_ugh the invoic_s _re received and settled aft_r th_ end _f the accounting period the _xp_ns_ still r_lat_s to th_ accounting p_riod _nd and under the _ccru_l acc_unting principles the expen_e need_ t_ be r_cord_d in _ur acc_unting _eriod end. In anoth_r exam_le we w_ll assume the same D___mb_r accounting peri_d _nd, as above. The business rent_ _ut a property for $12,000 per annum, which _s paid quart_rly _n advan_e _n Febru_ry, May, August _nd N_vember. Th_ pa_ment _n November cover_ November, D___mb_r and J_nu_ry, wh__h _s after _ur accounting period end. To r_cord the entire $3,000 payment would not be _n accordance w_th ___ru_l account_ng principles sinc_ the expense for January relates to the next acc_unting period. In th__ s_enario w_ hav_ a prepa_ment (i.e. a pa_ment _n advanc_) and, und_r the a__rual accounting _rinci_les, we need to recogn_se thi_ f_ct. Th_ amount of the prepayment __ $1,000 ($3,000 x 1/3) _nd is post_d to the general l_dg_r by debiting the _re_ayments account _n the balance sh__t _nd crediting the r_nt ex_ense in th_ profit and l___ _ccount.
Und_r the accrual a__ounting conc_pts th_r_ m__ b_ other types of ‘match_ng’ _dju_tment_ _u_h _s pr_viding for deferred and a__ru_d in_ome. D_f_rr_d income __ inc_me relat_ng t_ the next accounting peri_d but is rece_ved in th_ current accounting period, i._. the _ustomer pays _n _dv_nce or upfr_nt. Under the accrual acc_unting principl_s we need t_ debit th_ incom_ account in the pr_fit _nd l_ss _ccount and cred_t the deferred incom_ account in the balance sheet. Accrued income i_ inc_me that relate_ to the current p_riod that is not r_c_iv_d until the following acc_unting period. Under th_ ___ru_l accounting pr_nc_ples we have to _dju_t f_r th_s by d_biting the a__ru_d income _ccount _n the balance sh__t and crediting the sales a__ount in the prof_t and loss account.
Once the current accounting peri_d h_s been finalised _nd the general l_dg_r account_ closed down, the ___ru_l account_ng c_ncept requires u_ to r_v_r__ the adjustments, h_n__ match_ng them t_ the _orre_t a__ounting period. All _et_ of _ccounts and financial stat_m_nts ar_ r_quir_d t_ be prepared using th_ accrual accounting conce_t. It d__sn’t matt_r whether the accounts are for a sol_ tr_de, a partnership, a limited l_ab_l_ty partn_rship, a limit_d l_ab_l_ty c_mpany or a publ_c com_any all _tatutory and published a__ounts have t_ be pr_par_d using _ccru_l accounting. Accounts th_t _r_ produced for int_rnal purpo_e_, such a_ for manag_m_nt reporting, do not have to be pr_par_d u__ng accrual accounting but in the real world even int_rn_l management accounts th_t are onl_ g_ing to be u__d b_ th_ busin_ss owners are prepared using ___ru_l account_ng principles. Accrual account_ng _s the _tandardi_ed and accepted m_th_d _nd th_t is wh_t all organisations u_e. M_ny people find th_ accrual accounting _on_ept diffi_ult to grasp at first, but if y_u take a _tep back and think about it _ccru_l account_ng is logic_l _nd _t w_ll soon f_ll in to pl_ce.
Pr_paring accounts and financial statements using the a__rual accounting _on_epts __ not difficult, however _t w_ll require a b_t _f th_ught. In the real world it __ the _ccru_ls accounting c_ncept that _revents accounts and fin_n_i_l _tatement_ being prepared th_ da_ _ft_r the _nd _f th_ account_ng period. Before the a__ounting period l_dg_r_ _an be clo_ed _nd the accounts pr_p_r_d you n__d t_ ensure th_t all invoices relating to th_ _eriod _nd have b__n received. Many suppliers take tw_ t_ three w__k_ to ___ue pur_hase invoic_s, s_ if the business acquired g__ds and services close to th_ year end the purcha_e invoic_ w_n’t be rece_ved until the m_ddl_ t_ th_ end of January, theref_re the ledger_ cannot b_ clo_ed down until the _nd _f the first month immediately _fter the acc_unting period end.
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