What accruals are and how to post them in FreeAgent.

Definition of an accrual

Under UK accounting rules, you need to put costs that your business incurs into your profit and loss account at the point when the business uses what it's paid for - which is not necessarily the same as when the cost was paid.

Often you'll pay costs such as electricity and telephone bills in arrears. For example, you might pay your business's office electricity bill of £300 on 1st May 2011, but this would be for electricity that the business used between 1st February and 30th April 2011.

So if your business prepares accounts to 31st March each year, then if you just include your electricity in your accounts at the point when you pay for it, there will be two months' worth of cost missing from your accounts to 31st March 2011, and therefore your profit will be too high and you'll pay too much tax, because part of your electricity payment relates to February and March 2011.

So you need to put the £200, two months' worth of your electricity bill, into your profit and loss account as at 31st March 2011.

This is called an accrual.

Some larger businesses post monthly accruals, but in smaller businesses it's more common to post them each year.

The £200 will be paid for in the year to 31st March 2012, so you'll also need to make sure you take it out of the profit and loss account for that year. Accountants call this "reversing" the accrual.

How to post an accrual in FreeAgent

To post an accrual in FreeAgent, use journal entries.

In the above example, I would post two entries for the original accrual of £200, dated 31st March 2011, to debit the code where the cost will go, in this case 250 Office Costs, and credit code 660 Accruals.

How to reverse the accrual

To reverse the accrual, post another pair of journal entries for the same amount, dated the first day of your business's new accounting year, in this case 1st April 2011.

These would be the reverse of the first pair, in other words, credit the code where the cost will go, in this case 250 Office Costs, and debit code 660 Accruals.

Inclusive or exclusive of VAT?

Use the VAT exclusive figure from the bill when you work out accruals - unless you're on the VAT flat rate scheme and the accrual isn't for a large asset, in which case you should use the VAT inclusive figure.

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