ACCOUNTING FOR ACCRUALS AND PREPAYMENTS

The first time I heard about these terms during of the numerous financial analysis training that the company I work with usually asked us to attend, I nearly fainted! The words were so big and I said to myself, when will these accountants stops inventing big words to torment us? Coming to LBS to meet these terms again, I know there is no escape route again. I just had to face this head on. My first point of call was to go to the internet to browse these terms. Afterall, they say “google is our friend”.

After about 45minutes of checking various definition without getting the real meaning of what I wanted, I decided to talk to one of my colleagues whom everyone know that she is a Chartered Accountant. I heard they are the “gurus” in accounting having completed the accounting professional examinations. When I explained my dilemma to her, she smiled and asked me to sit down for proper meaning and their application in real life situation. I heave a sigh of relief. What I am actually looking in “Sokoto” (one of the northern states in Nigeria) is right inside my “Shokoto” (Yoruba word for trouser or pant) pocket.

Accrual are services enjoyed but not yet paid for. Just that? I snared! That looks quite easy for this big word. As at the time you are preparing your account, there are some services that you must have enjoyed but not yet paid for them, what we do in accounting is “to accrue for them”. Meaning you have to recognise those services and set aside part of your earning to cover them. This make sense to me, so I thought. So, if I am to prepare my account by 15^th of the month, and I take my salary for example, as at that time, the salary is yet to be paid, then I can actually accrue for my salary as income for the 15days that I have worked. As a big boy that I am, I use post paid mobile line, by that 15^th, I can then accrue for the call I have made between 1^st and 15^th of the month. This is making a whole lot of sense to me now. Please go on, I urged her on, having been able to apply this definition to real life situation.

Prepayment are services that you have paid for but not yet enjoyed. This is the direct opposite of accrual. She just nodded in amusement. I just lowered my star in the presence of this lady, I thought to myself. But come to think of it, what you don’t know, you really don’t know. Please madam, don’t worry, I got your point. Do you mean, my house rent that I paid upfront for a year, if I am preparing my financial statement mid-year, I will treat half of the payment as prepayment? She nodded and smiled. I wondered what will be going through her mind?  These terms are concepts which simply means ideas, assumptions and conditions based on which an entity records its financial transaction and organises its book keeping, she explains.

Thank you for everything Madam Accountant. I just stood up and walked away.

SGD