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Accruals, Bad Debts, Depriciation. Essay

811 words - 3 pages

Accruals and PrepaymentsWhat are accruals?Accruals are those amounts of money which supposed to be paid by a certain period and are not yet paid.Accruals are notes that do not enter in the trial balance.Accruals are placed on the credit side of the balance sheet under the current liabilities in the case of expenses and on the debit side of the profit and loss, (if expense).For Example:Assume that water and electricity is paid at the end of every three months.The bill was not paid on time. Details wereAmount water & Electricity bill duebill paidLM 37531st March 200231st March 2002LM 40030th June 20022nd July 2002LM 35030th September 20024th October 2002LM 40031st December 20025th January 2003The water and electricity account appeared as:Water & Electricity200231st MarBank3752nd JulyBank4004th OctBank350water and electricity paid on 5 January 2003 will appear in the books of the year 2003 as part of the double entry.The total amount of water and electricity was of LM 1,525, which is needed to be transferred to the profit and loss account. But LM 1,525 was put on the credit side of the water and electricity account we would have LM 1,525 on the credit side of the account and only LM 1,125 on the debit side. To make the account balance the LM 400 water and electricity owing for 2002 but paid 2003, must be carried down to 2003 as a credit balance it is a liability on 31st December 2002. instead of water and electricity owing, this is called accrued or accrual.The completed account can be shown:Water & Electricity2002200231 MarBank375 31 DecProfit & Loss 1,5252 JulyBank4004 OctBank35031DecAccrued C/d40015251,52520031st JanAccrued b/d 400Pre-Paid ExpensesWhat are prepaid expenses?Prepaid expenses are amounts of money paid in advance.For Example:Amount Insurance DueInsurance PaidLM 25031st March 2001LM250 28th Feb 2001LM 25030th June 2001LM 25030th September 2001LM 500 31stAug 2001LM 25031st December 2001LM 500 18thNov 2001The insurance account showsInsurance200128th FebBank25031st AugBank50018th NovBank500The last payment of LM 500 was not just for the year 2001. this can be split LM 250 for the three months of December and the LM 250 for the three months ended 31st March 2002.This is called prepaid expense. The account may now be completed.Insurance2001200128th FebBank25031st DecProfit & Loss 100031st AugBank50031st DecPrepaid c/d 25018th NovBank5001,250 1,25020021st JanPre paid b/d210Bad DebtsAlmost if not all, of the sales are on a credit basis, therefore the business itself is taking a risk...

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