Can anyone help me understand accruals better? I am not completely understanding accrused revenue, expenses, prepaids and all of those type of adjusting entries. This would be greatly appreciated!

CaptainForest

I come to your house and I fix your leaky pipes.

I wish for you to pay me $500, but you don’t have that money on hand that day, which is understandable. So I tell you, take 10 days and pay me then.

In 4 days though, it is my year end.

Does that $500 (which you will pay me in 6 days), count for this years revenue or next years?

The answer: This years. Since I have earned that revenue this year. Just because you haven’t paid me is irrelevant.

So that would be one example for Sales.


Let’s move to Prepaid Expenses.

Today is Dec. 1. You pay me $12,000 for 1 years rent to run from Dec. 1 – Nov. 30

Your JE is:
Dr. Prepaid 12,000
Cr. Cash 12,000

On Dec. 31, do you still have 12,000 in your Prepaid account? NO you don’t. You only have 11,000.

You have to take 1,000 out. Where has it gone? To rent expense…hence why you will:
Dr. Rent Exp 1,000
Cr. Prepaid 1,000