In this article we will you about the Prepayment and Accruals Double Entry. Here are the complete details of it.
Prepayment and accruals double entry: An insight
The domain of cash accounting pitted against accrual accounting is a very important point to be considered in the aspect of net profit calculation. Net profits calculated using these two measures come up with contrasting results. The main differences between cash accounting and accrual accounting is necessary to understand before we go into the details of the calculations. One of the main differences between cash accounting and accrual accounting is in the treatment of accruals and the modes of prepayments of the expenses incurred and the revenues generated.
Accruals refer to the expenditures that have been incurred in a particular period without the payments being made at the end of the stipulated time. Such measures are also called accrued expense, expense payable or expense owing. On the other side, accruals can also mean the revenues earned in a period without the payment being received at the end of the duration of time. Such accruals are referred to as revenue receivable or revenue in arrears.
Accruals double entries
Accruals double entries are generally observed in the National Income and Product Accounts and the same can be curtailed by using a step by step process of evaluation. An example will help understand the basic problems of double entries and how the same can be avoided. A car manufacturing industry generally buys steel and other build materials from manufacturers dealing with the same. These items which are traded between industries are referred to as intermediate products. Sales figures of the steel industry will include the sale of steel to the particular car manufacturing industry and the same will be included in the Gross Domestic Product of the country. However, the car manufacturing firm on selling a vehicle to the customer will also include the price of the car in the GDP of the country, thereby overlooking that the value of steel has been counted twice in the financial records of the country. This is essentially what is known as double counting in the domain of economic science. To avoid double entries into the National Income and Product Account book, only the final value of goods is reported to the agencies after subtracting the value of all intermediates which are used in the production of the final good.
Prepayment and post payments
Business accountants deal with prepayment and post payments in their everyday accounting records. The expenses which are incurred by a firm are the cost of goods and services which the firm uses to manufacture its final products. The invoice which is nothing but an official notice of the expenses incurred can be brought into the notice of the firms after the period has elapsed. This is what is known as post payment. Prepayment on the other hand is the receipt of the invoice in advance for all expenses to be incurred in the future. Prepayment and accruals double entries are sometimes commonly noticed in the accounts of firms and the same can be controlled with the use of stage by stage recording of the expenses incurred.
Hope this article about Prepayment and Accruals Double Entry helped you.