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

for by the suppliers. 

Accruals are necessary, since the expense and liability must be accounted for in the period they are 

incurred, even if the invoice has not been received. This is the accruals basis of accounting, which we 

looked at earlier in Chapter 3. 

An accrual can be an estimated amount, since the actual cost may not be known until the invoice is 

received. This is often based on a quote or previous costs. Some companies use goods received notes 

(GRNs) to calculate their accrued purchases (see Section 1.4 in Chapter 4).   

When the invoice is received, the expense and liability for the invoiced amount is then recorded. 

However, this effectively accounts for the expense and liability twice. 

To counteract this, the accrual must be reversed to avoid recording twice (see Section 1.5.1). 

1.1.2 Example 

A business is charged for their gas monthly and estimates their December bill to be approximately 

$500.00. The gas bill is received in January 20X5 for $506.00 after the December accounts have been 

closed off. 

The double entry for the accrual in December will be: 

December 20X4 

DEBIT 

Repairs and maintenance costs 

$500.00 

 

CREDIT Accruals 

(liability) 

 

$500.00 

The double entry for the invoice when it is received in January (ignoring sales tax) will be: 

January 20X5 

DEBIT 

Repairs and maintenance costs  

$506.00 

 

CREDIT 

Accounts payable (liability) 

 

$506.00 

The double entry for the accrual reversal in January will be: 

January 20X5 

DEBIT 

Accruals (liability)  

$500.00 

 

CREDIT 

Repairs and maintenance costs  

 

$500.00 

Note that in this example, the estimate of $500.00 for the expense is accounted for in 20X4, and the 

amount under accrued of $6 is accounted for in 20X5. This is because the business had still not 

received the bill when closing off the December accounts and therefore had to make an estimate of the 

cost. This is common in practice due to delays in receiving supplier invoices.  

Accruals and prepayments might seem difficult at first, but the following examples should help to clarify 

the principle involved, that expenses should be matched against the period to which they relate. We can 

regard accruals and prepayments as the means by which we move charges into the correct accounting 

period. If we pay in this period for something which relates to the next accounting period, we use a 

prepayment to transfer that charge forward to the next period. If we have incurred an expense in this 

period which will not be paid for until next period, we use an accrual to bring the charge back into this 

period. 

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