Accrual and prepayments

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If you buy a years supply of something in one go, then the profit for that period will be reduced unfairly as the years supply should be spread evenly of the coming twelve months. This also applies to quarterly arrangements such as rent where the cost should be spread over three months. Similarly if you get billed quarterly in arrears (perhaps with your phone bill) then you need to account for the current usage even though the bill has not arrived.

Accruals and Prepayments are a way of doing this without having to manually calculate the amount to release each month.

Before you start though you need to consider if this is something that needs to be taken into account, a £900 quarterly phone bill may not be a material amount if your overheads are £100000 per month, but could be if overheads were £10000 per month and certainly would be if overheads were £5000 per month. You need to make your own judgement dependant on the amount, the degree of accuracy you want and the cost of time in doing so.

Accruals work by removing the original cost from it's nominal code and storing it in the accruals account then each month the fraction of the cost is returned to the nominal account from which it originally came.

Prepayments work by putting the fraction of the anticipated cost from the prepayments accounts into the nominal code for the expected bill. At the end of the period (when the bill should have arrived) the provision is reversed out so that the actual cost is shown. (It is important to check that the bill has arrived otherwise you will get a strong negative value followed next period with a strong positive value)