Fixed Asset Management

Preparing Bu_in___ Acc_unt_ U_ing The A__ru_l Accounting M_thod

by

Kenton Casimaty

A__ru_l accounting i_ _re_aring the bus_ness accounts using th_ accrual account_ng concept, which _s one _f the fund_ment_l accounting prin_iples. The _bjective beh_nd accrual _ccounting is _matching_, which is b_sic_lly ensuring that _ll revenue_ and _ll expend_tures are recorded _n th_ accounting period t_ which th__ r_l_t_, i.e. t_ th_ accounting _eriod _n wh__h the r_v_nu_ was e_rned or the expense incurred. It do_sn_t matter _f th_ revenue wa_n_t a_tuall_ r_c_iv_d in th_ acc_unting _eriod, n_r do_s it m_tter if the expen_e wasn_t __tu_lly paid _n the account_ng _eriod, the import_nt th_ng is to ensure the tran_action __ compl_t_ly _nd a__urately recorded.

Accrued expen_e_ and pr_paym_nts ar_ the m_st c_mm_n accounting adjustments t_ make _ur_ the accounts adhere to ___ru_l accounting requirements, and th_s_ adjustments are b__t _xplain_d by way of an ex_mple. Let_s suppose a busin_ss has a De_ember accounting period _nd. In the Mar_h after the accounting per_od end the bu_ine__ r_c_iv_s a water b_ll f_r $300, wh_ch cov_rs December, J_nu_ry _nd F_bruar_. S_n_e part of the w_t_r bill relates to our period end the accrual _ccounting prin_iples state we n__d to include a pr_p_rti_n _f the w_ter bill in our accounts. If we d_ not h_v_ a precise amount the _nl_ w_y we can _uantify the expense is to _qually a__ortion it, therefore in th_s _cenario we will include a $100 accrued expense ($300 x 1/3) b_ debiting th_ wat_r rat__ account in th_ prof_t _nd loss a__ount and crediting th_ accrual_ account in th_ balanc_ sheet.

There are m_ny different typ_s of expenses that will straddle tw_ accounting p_riods, _ll of which ar_ tre_ted in this wa_ und_r the accrual account_ng principles. In add_t_on to expenses th_t straddle two acc_unting periods it __ n_t uncommon t_

receive

suppli_r pur_hase invoices lat_. You may mak_ many purchas_s dur_ng the _eriod to th_ _nd of D___mb_r, i.e. before the end _f the accounting period, but the supplier ma_ not actuall_ issue th_ invoic_ until after th_ accounting period end. Even th_ugh the _nvo_ces are received and settled after th_ end _f the accounting period the expense _t_ll rel_te_ t_ th_ accounting _eriod end and under th_ ___ru_l a__ounting pr_nc_ples the ex_ense need_ t_ be r_cord_d _n _ur acc_unting p_riod end. In anoth_r ex_mple we w_ll assume the same D___mb_r accounting peri_d end, as above. The business rents _ut a property for $12,000 per annum, wh_ch is paid quarterl_ _n advan_e in Febru_ry, May, August _nd N_vember. The p_yment in

November

cov_rs November, D___mb_r and January, which i_ after _ur accounting p_riod end. To rec_rd the entire $3,000 payment w_uld not be _n accordanc_ w_th ___ru_l _ccounting principles since the expense f_r Januar_ relates to the next accounting p_riod. In th_s sc_nario w_ hav_ a prep_yment (i.e. a p_yment in advan_e) and, und_r the accrual accounting principle_, we need to rec_gnise thi_ f__t. Th_ amount _f th_ pr_paym_nt __ $1,000 ($3,000 x 1/3) and is post_d to the general ledger b_ d_b_t_ng th_ prepayments account _n the balance _heet and crediting the r_nt ex_ense in the prof_t and loss acc_unt.

Und_r th_ accrual acc_unting c_ncepts there may b_ other types _f _m_tching_ _dju_tment_ such a_ _rov_d_ng for d_f_rr_d and accru_d _ncome. D_f_rr_d income is income relating to the n_xt accounting per_od but is rece_ved in the current accounting period, _.e. the cust_mer pays in advanc_ or upfr_nt. Und_r the ___ru_l _ccounting principles we need t_ d_b_t th_ _ncome a___unt in the prof_t _nd lo__ account and cred_t the deferred inc_me _ccount _n the balance sheet. Accrued income _s inc_me that r_l_t_s to th_ current _eriod that is not r___iv_d until the following acc_unting period. Und_r the ___ru_l accounting principles we have to adju_t f_r thi_ by debiting the accrued income a__ount _n the balance sh__t _nd crediting the sales account in the _rofit and loss a__ount.

Once the current accounting period h_s been finalised and th_ general ledger acc_unts closed down, th_ _ccru_l accounting conc_pt requires us to r_v_r__ the adjustments, hence m_tching them to the c_rr_ct accounting period. All s_ts of account_ and financial st_tements _r_ re_uired t_ be prepared using the accrual acc_unting c_ncept. It d__sn_t matt_r wh_th_r the accounts are for a _ole tr_d_, a partnership, a limited liability partnership, a limited liabilit_ company or a _ublic company all st_tutory and published _ccounts have to be _re_ared using accrual accounting. Accounts th_t ar_ produced for internal purposes, _uch __ for m_n_gement reporting, do n_t have to be pr_par_d us_ng accrual accounting but in the real world even internal m_n_gement accounts th_t are onl_ g_ing to be u_ed by the bus_ness owners _r_ prepared using accrual acc_unting principles. Accrual account_ng _s the standardis_d and accepted meth_d _nd th_t is what all organisations us_. Man_ people find th_ a__rual accounting _on_ept d_ff_cult t_ gr_sp at f_r_t, but if y_u take a st_p back and think about it accrual acc_unting __ log_cal _nd it w_ll soon f_ll in to place.

Preparing accounts and financial statements using the _ccru_l accounting concepts __ not difficult, however it will require a b_t _f thought. In th_ real world it _s th_ accruals accounting conc_pt th_t pr_v_nts accounts and f_nanc_al statements being prepared th_ d__ _ft_r the end of the acc_unting period. B_f_r_ the _ccounting period ledger_ __n be _losed and th_ accounts prepared you n__d to _nsur_ th_t _ll invoice_ relating to th_ _eriod end have been received. Many suppliers take two t_ three w__ks t_ issue purcha_e invoi_es, __ if the business _cquired g__ds and services close to the year end the purch_se invoi_e w_n_t be received until the m_ddl_ t_ th_ end of January, theref_re the ledgers cannot be clos_d down unt_l the end _f the first m_nth imm_diat_ly aft_r the accounting _eriod end.

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