The accruals idea: match costs to the year
Costs belong to the year they are used, not the year they are paid. Learn to split a payment between two years.
In this room: 3 tasks, 10 questions
- Costs belong to the year they are used4 questions
- Counting the months4 questions
- What it does to profit2 questions
Beckside Joinery makes fitted furniture. Its accounting year ends on 31 December.
The accruals idea is this: income and costs go into the year they are earned or used. The date the money moves does not decide it.
- Accrued expense
- a cost used this year that has not been paid or billed by the year end
- Prepaid expense
- a cost paid this year that will be used next year
Both are put right with a year-end adjustment, so that profit is measured on twelve months of costs, no more and no less.
Answer the questions below
3 more questions follow in this task.
To split a cost between two years, count the months that fall in each.
On 1 November the joinery pays £3,600 rent for its workshop. The payment covers the 6 months from 1 November to 30 April.
- Work out the cost of one month
- Count the months up to 31 December: they are this year's cost
- The months after 31 December are next year's cost
Answer the questions below
3 more questions follow in this task.
The rest of the payment is next year's cost. It must not be left in this year's rent expense.
Costs that are too high make profit too low. Costs that are too low make profit too high.
Answer the questions below
1 more question follows in this task.