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accrued income???

if you sold a subscription for £5000 for a year and you were due to have it paid in 10 instalments across the year.... how would you account for it? what would the journal entries be?

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By BKD
10th Jun 2012 21:51

Two steps

Dr debtors £5k

Cr income £5k

 

And then, if the period of subscription straddles the year-end,

Dr income £x

Cr accrued income £x

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10th Jun 2012 22:00

Not accrued income

Accrued income is income that has not yet been credited to income.

The second journal entry is:

 

Dr income £x

Cr deferred revenue £x

 

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10th Jun 2012 22:23

so if i pick round amounts and say the yearly subscription is £12000 and im to recieve 10 instalments of £1200. would i be correct in saying

 

Raise the invoice

DR Debtor account £12000

CR Accrued Income £12000

 

Then for 10 months:

DR Accrued income £1200

CR Revenue £1000

CR Deferred Income £200

 

And the final two months

DR Deferred Income £1000

CR revenue £1000

In my head you'd accrue for the months you cant recognise in the P&L yet, an when you get a payment your always going to have part that relates to the month and part that is for a future month???

Or am i totally going wrong here??

 

 

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10th Jun 2012 22:33

That's wrong

There is no accrued income.

 

Raise the invoice

DR Debtor account £12000

CR Income £12000

First month:

DR Income £11000

CR Deferred Income £11000

Second month:

Dr Deferred Income £1000

Cr Income £1000

etc. until Deferred Income is zero

When money is received:

Dr Bank

Cr Debtor account

 

 

 

 

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10th Jun 2012 22:38

Is it classed as deferred income because you've earnt it, regardless of whether the funds have actually hit the bank yet?

 

Does this have the same effect if you were paying a rates bill that you had recieved for the whole year, your paying monthly would you treat this as a prepayment an recognise it each month?

 

Thank you for your help

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10th Jun 2012 23:09

Answers

 

"Is it classed as deferred income because you've earnt it, regardless of whether the funds have actually hit the bank yet?"

That's the whole point. You haven't earned it yet. You have invoiced for it but it's not been earned.  Once you have raised an invoice the payments don't affect the deferred revenue.

"Does this have the same effect if you were paying a rates bill that you had recieved for the whole year, your paying monthly would you treat this as a prepayment an recognise it each month?"

If you entered the bill then you would treat the part of the expenses that had not yet been incurred as prepayments.

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11th Jun 2012 08:03

So why in this instance do you accrue when the same principle applies you havent earnt it yet but you've entered the bill?

 

You are asked to raise a sales invoice to a customer for £12000 + vat. The invoice is to be raised and dated in january 2002, although the work being done to generate the income is being done over january, february and march 2002.

a) what is the double entry for the transaction in january 2002?

b) what is the double entry in relation to the transaction in february and march 2002?

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By BKD
11th Jun 2012 08:30

Apologies

for the confusion that my post caused.

I did of course mean deferred, not accrued (which is a debit), income. Think I'll stick to amswering questions on tax ;)

 

But to try and redeem myself, in answer to the above question your entries should be (ignoring the VAT):

Dr Debtors £12,000

Cr Income £12,000

Dr Income £8,000

Cr Deferred income £8,000

 

And then in each of Feb and Mar,

Dr Deferred income £4,000

Cr Income £4,000

Have I got that right, Peter  ;)

 

EDIT - crossed in post with Peter's reply

 

 

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11th Jun 2012 08:24

 

 

"So why in this instance do you accrue when the same principle applies you havent earnt it yet but you've entered the bill?"

When did I say you accrue?

"You are asked to raise a sales invoice to a customer for £12000 + vat. The invoice is to be raised and dated in january 2002, although the work being done to generate the income is being done over january, february and march 2002.

a) what is the double entry for the transaction in january 2002?"

There's two transactions in January 2002:-

 

Raise the invoice:

DR Debtor Account £14,400

Cr VAT £2,400

CR Income £12,000

Deferred income calculation at 31/01/02:

DR Income £8,000

CR Deferred Income £8,000

 

"b) what is the double entry in relation to the transaction in february and march 2002?"

February 2002:-

I would reverse the 31/01/02 at 01/02/02 (that's best practice):

Dr Deferred Income £8,000

Cr Income £8,000

and calculate the deferred income again at 28/02/02:

Dr Deferred Income £4,000

Cr Income £4,000

March 2002:-

Reverse the 28/02/02 at 01/03/02:

Dr Income £4,000

Cr Deferred Income £4,000

 

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11th Jun 2012 08:33

sorry i wasnt refering to an answer you had given

 

"When did I say you accrue?"

Sorry i didnt mean that you had said to accrue, i posted this question previously and was told by two other people to accrue in this instance.

this is why im getting confused, i understand the principle that if its unearn't you'd defer... so it would make sense to defer for both scenarios.

so what situation would you accrue? thank you.

 

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By BKD
11th Jun 2012 08:37

Accrued income

Lauraoneill wrote:

 

so what situation would you accrue? thank you.

 

If you had completed the work but not yet invoiced it.

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By BKD
11th Jun 2012 08:35

I don't think that's right

petersaxton wrote:

 

"b) what is the double entry in relation to the transaction in february and march 2002?"

February 2002:-

I would reverse the 31/01/02 at 01/02/02 (that's best practice):

Dr Deferred Income £8,000

Cr Income £8,000

and calculate the deferred income again at 28/02/02:

Dr Deferred Income £4,000

Cr Income £4,000

March 2002:-

Reverse the 28/02/02 at 01/03/02:

Dr Income £4,000

Cr Deferred Income £4,000

 

Your 2nd and 3rd journals are the wrong way round (see how easy it is ;)  )

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11th Jun 2012 08:43

Never copy and paste!

BKD wrote:

petersaxton wrote:

 

"b) what is the double entry in relation to the transaction in february and march 2002?"

February 2002:-

I would reverse the 31/01/02 at 01/02/02 (that's best practice):

Dr Deferred Income £8,000

Cr Income £8,000

and calculate the deferred income again at 28/02/02:

Dr Deferred Income £4,000

Cr Income £4,000

March 2002:-

Reverse the 28/02/02 at 01/03/02:

Dr Income £4,000

Cr Deferred Income £4,000

 

Your 2nd and 3rd journals are the wrong way round (see how easy it is ;)  )

Sorry, I should have said:

and calculate the deferred income again at 28/02/02:

Dr Income £4,000

Cr Deferred Income £4,000

March 2002:-

Reverse the 28/02/02 at 01/03/02:

Dr Deferred Income £4,000

Cr Income £4,000

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11th Jun 2012 08:25

not to worry its making more sense to me now.. its the slight wording of these scenarios that can give completely different outcomes that confuses me.

Thanks.

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Don't worry Laura ...

I've worked with loads of qualified accountants who seems to have missed out learning their fundamental accounting concepts. Most of what accountancy is about is to match costs and revenues and allocate them to the period in which they arise. Most of the other rules just tell you how to do this in specific circumstances. For example, if you sell magazine subscriptions it makes sense to match the revenue from the March edition with the costs of producing that issue. The income of course may have been received as a 12 month lump some, in instalments or in arrears from a retailer and the costs similarly all over place. We simply use accruals and deferments to move the items from one period to another to make everything match up.

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11th Jun 2012 10:29

One client

I got a new client and they would receive money in advance before expeditions that they ran. 

They were recognising the revenue when it was received and not when the expedition took place which could be over a years later.

I set up a deferred revenue account for over £1m.

When the recession reduced their revenue they got into financial difficulties and were taken over.

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15th Jun 2012 11:09

Thin Capitalisation

I just had a client wander in and ask to set up a new company... when I said the company can have £100 in share capital, she said, but what about the thin capitalisation rules....I am thinking if you cant work out accruals and prepayments are you in the right job!

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21st Jun 2012 08:51

Hmm

Do the exact opposite of what you would do with a bill for rates (12 months charge payable in 10 instalments).

Obviously subsitute sales for rates expense as you go along.

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