Accruals and Expenses owing

[echo---pscbro]

Hi,

I am a French accounting student who is now studying UKGaap
accounting. I have a book which for some applications in the Accruals
concept relates either Accruals or Expenses owing. Is there any
difference between the two?

Further to this, up to now, my understanding of this concept is that
an expense for which we don't have an invoice but we know the amount
(from a yearly contract such as the rent or insurrance fees) has to be
input in the accounting period of its consumption. To my eyes this can
be called an Expense owing.

Now, if the amount for the expense can't be determined precisely.
Taken for example 500 professional phones and communication contracts.
The subscription fees are the same. However, the amount related to
communication can change (those that exceed the contract) . We assume
it can change consistently. Would that still be an Expense owing or
Accruals or something else.

Can someone help me understand this better without going too far into
concepts...in a simple way.

Pcl

 

[Ronald Raygun]

I am a French accounting student who is now studying UKGaap
accounting. I have a book which for some applications in the Accruals
concept relates either Accruals or Expenses owing. Is there any
difference between the two?

An accrual isn't technically owing until invoiced.

Further to this, up to now, my understanding of this concept is that
an expense for which we don't have an invoice but we know the amount
(from a yearly contract such as the rent or insurrance fees) has to be
input in the accounting period of its consumption. To my eyes this can
be called an Expense owing.

It is very similar, yes.

Now, if the amount for the expense can't be determined precisely.
Taken for example 500 professional phones and communication contracts.
The subscription fees are the same. However, the amount related to
communication can change (those that exceed the contract) . We assume
it can change consistently. Would that still be an Expense owing or
Accruals or something else.

Your financial year might end on 31st December, and you may be
expecting a two-month electricity bill covering December and January.
Until you get the bill (in February) you won't know exactly how big
the bill is going to be, and therefore how much of it to attribute to
the old year and how much to the new. But you still need to show the
December portion as an accrual.

The trick is to delay finalising the accounts until you do know what the
amount is. In the meantime, if necessary, you can prepare preliminary
accounts in which the accrual figures are only estimated.

 

[echo---pscbro]

My understanding;

Owing expenses can be closely determined in their amount (rent,
insurances fees, misc subscriptions...).

Accruals can't be determined as closely as owing expenses in their
amounts.

For both the invoice is missing by the date of year end. Now for
owing, we know how much is due whereas for accrual an estimation has
to be done.

Is it the right way to see things?

Thanks,
Pcl

 

[Peter Saxton]

My understanding;

Owing expenses can be closely determined in their amount (rent,
insurances fees, misc subscriptions...).

Accruals can't be determined as closely as owing expenses in their
amounts.

For both the invoice is missing by the date of year end. Now for
owing, we know how much is due whereas for accrual an estimation has
to be done.

Is it the right way to see things?

Thanks,
Pcl

What is the difference between "Owing Exoenses" and Creditors for
expenses?

This is my understanding:

You have the invoice - creditor
You don't have the invoice - accruals

 

[Ronald Raygun]

My understanding;

Owing expenses can be closely determined in their amount (rent,
insurances fees, misc subscriptions...).

Unfortunately all three of these are not good examples because
they do not have the property (which you mention below) of having
the invoice missing by year end. This is because things like rent,
insurance premiums, and service subscriptions are generally invoiced
and charged in advance.

Good examples of expenses which are charged in arrears are interest
on loans, payments for work partially done, payments for comsumption
of services (such as gas and electricity). Most of these are often
capable of being estimated reasonably well.

Accruals can't be determined as closely as owing expenses in their
amounts.

For both the invoice is missing by the date of year end. Now for
owing, we know how much is due whereas for accrual an estimation has
to be done.

Is it the right way to see things?

No. Accurate knowledge of the amount involved is not the basis on
which to distinguish between a "normal" expense (which has already
been invoiced but not paid yet) and an accrual. The distinction is
made on the basis of whether it has been invoiced. An accrual is
still an amount owing.

Suppose your financial year ends on 31st December.
Suppose you receive a gas bill on 20th December for £500 to cover a
period of 50 days ending on 15th December but don't actually
pay it until 10th January. You estimate that gas usage for the
rest of December will also accrue at the rate of £10 per day.

Your bookkeeping entries would be:

20th December
Dr £500 Heating (Expense)
Cr £500 Gas company

31st December adjustments
Dr £160 Heating (Expense)
Cr £160 Accruals

This will show the correct amount for gas usage of £660 in the Profit
and Loss Account, and it will show £660 in the Balance Sheet as owing,
of which £500 will be in Creditors (Gas comapny) and £160 in Accruals
(Heating expenses).

Then in the new year:

10th January
Dr £500 Gas company
Cr £500 Bank

Later you get a gas bill for 50 days ending 3rd February for £550.

7th February
Dr £160 Accruals
Dr £390 Heating
Cr £550 Gas Company

26th February
Dr £550 Gas Company
Cr £550 Bank

 

[Michael6494]

Hi,

I am using JDEdwards accounting software and every month, I have to upload the accruals and JDE allows me to reverse those accruals automatically at the beginning of next month. My problem is how to re-accrue the reversed accruals for the next period? Below is the illustration;

Mar'14

Dr Expenses(I/S) 100
Cr Accrued Expenses(B/S) 100

April( Reversal)

Dr- Accrued Expenses(B/S) 100
Cr- Expenses 100

Invoices received in April

Dr- Expenses 80
Cr- Cash 80
Dr Accrued Exp(B/S) 20
Cr Expenses 20

How do I re-accrue the remaining 20 ?

Dr- Exp(I/S) 40
Cr- Accrue Exp(B/S) - 40

Or ??

Thanks!