I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

PART D: RECORDING TRANSACTIONS AND EVENTS 

 

184

 

1.2 Example 1: accruals 

Horace Goodrunning, trading as Goodrunning Motor Spares, ends his financial year on 28 February each 

year. His telephone was installed on 1 April 20X6 and he receives his telephone account quarterly at the 

end of each quarter. On the basis of the following data, you are required to calculate the telephone 

expense to be charged to the statement of profit or loss for the year ended 28 February 20X7. 

Goodrunning Motor Spares – telephone expense for the three months ended: 

 

$ 

30.6.20X6 

23.50 

30.9.20X6 

27.20 

31.12.20X6 

33.40 

31.3.20X7 

36.00 

Solution

 

The telephone expenses for the year ended 28 February 20X7 are: 

 

$ 

1 March – 31 March 20X6 (no telephone) 

 0.00 

1 April – 30 June 20X6 

 23.50 

1 July – 30 September 20X6 

 27.20 

1 October – 31 December 20X6 

 33.40 

1 January – 28 February 20X7 (two months) (2/3 × 36) 

   24.00 

 

 108.10 

The charge for the period 1 January – 28 February 20X7 is two-thirds of the quarterly bill received on 

31 March. As at 28 February 20X7, no telephone bill has been received because it is not due for 

another month. However, it is inappropriate to ignore the telephone expenses for January and February, 

and so an accrued charge of $24 is made, being two-thirds of the quarter's bill of $36. 

The accrued charge will also appear in the statement of financial position of the business as at  

28 February 20X7, as a current liability. 

1.3 Example 2: accruals 

Cleverley started in business as a paper plate and cup manufacturer on 1 January 20X2, making up 

accounts to 31 December 20X2. Electricity bills received were as follows. 

 20X2 

20X3 

20X4 

 $ 

$ 

$ 

31 January 

– 

6,491.52 

6,753.24 

30 April  

5,279.47 

5,400.93 

6,192.82 

31 July  

4,663.80 

4,700.94 

5,007.62 

31 October  

4,117.28 

4,620.00 

5,156.40 

What should the electricity charge be for the year ended 31 December 20X2? 

Solution

  

The three invoices received during 20X2 totalled $14,060.55, but this is not the full charge for the 

year: the November and December electricity charge was not invoiced until the end of January. To show 

the correct charge for the year, it is necessary to accrue the charge for November and December based 

on January's bill. The charge for 20X2 is: 

 

 

$    

Paid in year 

 

14,060.55 

Accrual (

2

/

3

  $6,491.52) 

 

  4,327.68 

 

 

18,388.23 

The double entry for the accrual (using the journal) will be: 

DEBIT 

Electricity account  

$4,327.68 

 

CREDIT Accruals 

(liability) 

 

$4,327.68 

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CHAPTER 10  

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  ACCRUALS AND PREPAYMENTS