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3 min 59 sec
0:00
Software paid upfront
0:20
Accrual, revisited
0:35
Prepayments
1:18
Accrued income
1:55
Accruing costs
2:25
Setting it up in Beeswax
2:58
Recap and quiz
Accounting 101
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Keeping it straight
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Episode 19
Accruals and Prepayments
(Income and costs, in the right month.)
A year of software paid for in October, and December's work invoiced in January. How prepayments, accrued income and accruals put income and costs in the right month.
accruals
prepayments
accrued income
accrual accounting
Transcript
0:00
In October, Maya paid twelve hundred for a year of design software. All at once. October's profit and loss took one look at it, and fainted.
0:10
Today: accruals and prepayments. Putting income and costs in the months they actually belong to.
0:20
Remember accrual accounting? You record income when you earn it, and costs when you use them up. Not when the cash moves.
0:28
Most of the time, the paperwork and the work line up nicely. These are the times they don't.
0:35
Prepayments first. Twelve hundred buys twelve months of software. On the first of October, Maya has used none of it. So it isn't an expense yet. It's an asset. A prepayment. Something the business has paid for, and still gets to use.
0:52
Each month, one twelfth gets used up. Debit software, an expense, one hundred. Credit prepayments, one hundred. The asset shrinks, and the expense appears, month by month.
1:06
By the thirty-first of December, three hundred has been used, and nine hundred is still prepaid, sitting on the balance sheet. October's profit has made a full recovery.
1:18
Now the other way round. In December, Maya did twenty hours for Corner Café. Twenty-four hundred of work. But the invoice doesn't go out until January.
1:29
The work was done in December, so the income belongs in December. At year end, Maya posts a journal. Debit accrued income, an asset, twenty-four hundred. Credit services, twenty-four hundred.
1:45
In January, the real invoice goes out. So she reverses the journal, and the income isn't counted twice. Once is accounting. Twice is fiction.
1:56
The same idea works for costs. December's co-working bill turns up in January? Accrue it. Debit the expense in December, and credit accruals, a liability, until the bill arrives.
2:10
So. Prepayments and accrued income are assets. Accruals and deferred income are liabilities. You've met deferred income already. It's the deposit from episode eleven, wearing a different hat.
2:25
In Beeswax, first add the accounts you need to your chart of accounts. A prepayments asset. An accrued income asset. An accruals liability.
2:36
Code the software bill straight to prepayments. Expense lines can use asset accounts too.
2:42
Then each adjustment is a manual journal. Debits on one side, credits on the other, and the Save button won't budge until they balance. Journals don't reverse themselves, so January's reversal is one you post yourself.
2:58
So. Record income when it's earned, and costs when they're used. Paid in advance? A prepayment. Earned, but not invoiced? Accrued income. Used, but not billed yet? An accrual. And reverse the accrual when the real document arrives.
3:17
Quick one. On the first of July, you pay six hundred for a year of insurance. Your year ends on the thirty-first of December. How much is an expense this year? And how much is still prepaid?
3:31
Have a think.
3:35
Six months used, so three hundred is an expense. Six months to go, so three hundred is still a prepayment.
3:44
Accountants call this the matching principle. Maya calls it making October less dramatic.
3:51
Next time: unbilled work. Hours you've done but haven't invoiced yet, and why they still count.