Thank you for explaining the reversal so clearly. At no point do my learning materials remind me that the bill will generate a Dr/Cr when it does finally arrive. Sanity saved, thanks!
Thank you for sharing this video. I have a question: During a month-end accrued. What if the prior month's accrued amount is different (for example, less) when billed in the next month?
@@tangcaroline3842 the reversal doesn’t get cancelled. If no payment is made, then no expense is recognised in the following year. That doesn’t change the fact that the expense was incurred in the prior year.
Wouldn't just doing Dr Exp Cr Accr. Exp in month 12 and then Dr Accr. Exp and Cr Bank when the bill arrives work? How can the expense be double counted if it was entered only once in month 12 and no times in month 1? Wouldnt doing this complete reversal in month 1 then make month 1 understated? Edit: Nevermind! I think i get it. The accrual is just an estimate so we need to remove the estimate from our accounts and recognise the true value of the expense when the bill arrives in the next FY. What do we then do with the difference between the estimate and the actual that eventually gets posted into the next FY? Does this depend on materiality? And what if it is material?
The reason why we must reverse the accrual is because the bookkeeper records the expense when it is paid. If the accrual is not reversed, the expense will be double counted.
@@armywhammer-dc9qk there may be a variance but that it shouldn’t be material. Because it is a change in estimate, we correct it in the current year anyway. We don’t go back and adjust last year’s numbers.
Hi Magon, Thanks for taking the time and wonderful explanation. I’m still struggling to grasp it fully. If in 1st. Of next year I made the reversals. Now Electricity Expenses account is 0. Assuming on 3rd of Jan , I receive 100 $ invoice of last yea’s electricity. I will debit Electricity Expenses account and Credit Accounts Payable. At this point of Jan the next year, isn’t the account Electricity Expenses overstated? Since it has the $ 100 of last year, and the new Accrued Electricity expenses of the new period.
Hi there When you process the reversal, you will be crediting the electricity expense. This means that it is sitting with a credit balance and not zero. When you debit the account once payment is made, the debit offsets the credit, and the account has zero relating to last year's expenses. Hope that helps :)
@@MagonGajewski perfect makes a lot of sense now :) Would you be kind enough to explain to me when to capitalize the employees wages in a certain project? When do project employees salaries go on P/L or WIP in balance sheet?
If you get one bill (£120) for that one year period, how do you go about accruing that? Because if you do the journals for accruals and then reverse it once you get the bill at the end of the year, won't it still show a £120 cost at the end of the year? Wouldnt this be incorrect if the cost was incurred throughout the year?
If you receive a bill, then you don’t need an accrual because you can just recognise the liability. However, if you don’t receive a bill at the reporting date, you need to accrue for the expense that you have used up. Hope that makes sense!
A question for you. What if you don't know when you will receive the bill? Is it more suitable to leave the accrual entry as is until we receive the bill so that once we receive it, we can trace it to the accrual and reverse the accrual and make the payment entry at the same time?
Thank you for explaining the reversal so clearly. At no point do my learning materials remind me that the bill will generate a Dr/Cr when it does finally arrive. Sanity saved, thanks!
Thank you very much for explain it so easily to understand.
Amazing explanation!
Thank you for explaining it clearly
Good job!!
Thank you for sharing this video. I have a question: During a month-end accrued. What if the prior month's accrued amount is different (for example, less) when billed in the next month?
Hi there. The difference will be recognised in profit or loss in the following year when the payment is made. :)
@@MagonGajewski Thank you so much for your reply. Another question if you don't mind. What if no payment is made? Do we need to cancel the reversal?
@@tangcaroline3842 the reversal doesn’t get cancelled. If no payment is made, then no expense is recognised in the following year. That doesn’t change the fact that the expense was incurred in the prior year.
@@MagonGajewski Thank you so much for your reply. 👍
why we can't do " Accrual Dr./ Cash-Bank Cr.?
Wouldn't just doing Dr Exp Cr Accr. Exp in month 12 and then Dr Accr. Exp and Cr Bank when the bill arrives work? How can the expense be double counted if it was entered only once in month 12 and no times in month 1? Wouldnt doing this complete reversal in month 1 then make month 1 understated?
Edit: Nevermind! I think i get it. The accrual is just an estimate so we need to remove the estimate from our accounts and recognise the true value of the expense when the bill arrives in the next FY. What do we then do with the difference between the estimate and the actual that eventually gets posted into the next FY? Does this depend on materiality? And what if it is material?
The reason why we must reverse the accrual is because the bookkeeper records the expense when it is paid. If the accrual is not reversed, the expense will be double counted.
@@MagonGajewski thank you! Does it matter when there is a variance between the bill and the accrual?
@@armywhammer-dc9qk there may be a variance but that it shouldn’t be material. Because it is a change in estimate, we correct it in the current year anyway. We don’t go back and adjust last year’s numbers.
Hi Magon,
Thanks for taking the time and wonderful explanation. I’m still struggling to grasp it fully.
If in 1st. Of next year I made the reversals. Now Electricity Expenses account is 0.
Assuming on 3rd of Jan , I receive 100 $ invoice of last yea’s electricity. I will debit Electricity Expenses account and Credit Accounts Payable.
At this point of Jan the next year, isn’t the account Electricity Expenses overstated? Since it has the $ 100 of last year, and the new Accrued Electricity expenses of the new period.
Hi there
When you process the reversal, you will be crediting the electricity expense. This means that it is sitting with a credit balance and not zero. When you debit the account once payment is made, the debit offsets the credit, and the account has zero relating to last year's expenses. Hope that helps :)
@@MagonGajewski perfect makes a lot of sense now :)
Would you be kind enough to explain to me when to capitalize the employees wages in a certain project? When do project employees salaries go on P/L or WIP in balance sheet?
If you get one bill (£120) for that one year period, how do you go about accruing that? Because if you do the journals for accruals and then reverse it once you get the bill at the end of the year, won't it still show a £120 cost at the end of the year? Wouldnt this be incorrect if the cost was incurred throughout the year?
If you receive a bill, then you don’t need an accrual because you can just recognise the liability. However, if you don’t receive a bill at the reporting date, you need to accrue for the expense that you have used up.
Hope that makes sense!
Nice lecture
A question for you. What if you don't know when you will receive the bill?
Is it more suitable to leave the accrual entry as is until we receive the bill so that once we receive it, we can trace it to the accrual and reverse the accrual and make the payment entry at the same time?