Concept Issue: Help :D

[luffy]

If any of you guys have the Cambridge VCE Accounting Units 3/4 textbook (A copy of the textbook which has been posted in another thread), I am referring to the bottom of page 195 of the text. It talks about how when paying cash for an accrued expense in a reporting period, part of it is recorded in the payments journal as an "accrued expense" for the previous Reporting Period, while the other part is simply recorded as an "expense".
The example they give is electricity. I.e. $300 of accrued electricity while $1200 electricity expense.

My concern is, how is it possible to have electricity as a "normal expense"? Wouldn't it have to be either prepaid or accrued? For the case of electricity, wouldn't every electricity expense be accrued? In the textbook, $300 was an accrued electricity payment for the previous Reporting Period, while $1200 was an electricity payment for the current Reporting Period. Shouldn't this $1200 be an "accrued electricity payment" too?

Is it an issue with the textbook or is it just a concept issue on my behalf?

Thanks

[_avO]

For simplifying purposes, as long as the payment is made IN the same reporting period it is classified as a 'normal' expense which is why in this scenario the $1200 payment is an expense (yes in reality it is a post-paid payment but in VCE accounting it isn't)

[Fyrefly]

For simplifying purposes, as long as the payment is made IN the same reporting period it is classified as a 'normal' expense which is why in this scenario the $1200 payment is an expense (yes in reality it is a post-paid payment but in VCE accounting it isn't)

Actually, in reality, it's a "normal" payment too...

AvO's correct in all other respects though.

Just to rephrase it: The concept is that if an expense is not paid for in the same reporting period in which it is incurred, then it is "accrued". An expense is not accrued simply because you pay your bill after you've used the electricity... the time of use (incurred) must be in a different reporting period to the time of payment for there to be an accrued expense (for accounting purposes). I think that's what's tripping your thought processes.

Eg. Quarterly reporting period (every three months). Electricity bill is paid monthly. During the reporting period of July 1 - Sept 30:
* Used $500 worth of electricity in July.
* Received electricity bill for July on Aug 7th.
* Paid bill on Aug 8th.
* At the end of the reporting period on Sept 30, the expense pertaining to the July electricity usage is not outstanding - it has been both incurred *and* paid... and is thus not accrued... thus there is no need to make a balance day adjustment regarding it.

[luffy]

For simplifying purposes, as long as the payment is made IN the same reporting period it is classified as a 'normal' expense which is why in this scenario the $1200 payment is an expense (yes in reality it is a post-paid payment but in VCE accounting it isn't)

Actually, in reality, it's a "normal" payment too...

AvO's correct in all other respects though.

Just to rephrase it: The concept is that if an expense is not paid for in the same reporting period in which it is incurred, then it is "accrued". An expense is not accrued simply because you pay your bill after you've used the electricity... the time of use (incurred) must be in a different reporting period to the time of payment for there to be an accrued expense (for accounting purposes). I think that's what's tripping your thought processes.

Eg. Quarterly reporting period (every three months). Electricity bill is paid monthly. During the reporting period of July 1 - Sept 30:
* Used $500 worth of electricity in July.
* Received electricity bill for July on Aug 7th.
* Paid bill on Aug 8th.
* At the end of the reporting period on Sept 30, the expense pertaining to the July electricity usage is not outstanding - it has been both incurred *and* paid... and is thus not accrued... thus there is no need to make a balance day adjustment regarding it.

I looked at what you said and I find that the likely reason for my mistake. However, shouldn't the "different reporting period" statement be made in the definition of an accrued expense? In the textbook, all it says in the definition is: "An expense that has been incurred but not yet paid"

But thanks to both of you.

[Fyrefly]

For simplifying purposes, as long as the payment is made IN the same reporting period it is classified as a 'normal' expense which is why in this scenario the $1200 payment is an expense (yes in reality it is a post-paid payment but in VCE accounting it isn't)

Actually, in reality, it's a "normal" payment too...

AvO's correct in all other respects though.

Just to rephrase it: The concept is that if an expense is not paid for in the same reporting period in which it is incurred, then it is "accrued". An expense is not accrued simply because you pay your bill after you've used the electricity... the time of use (incurred) must be in a different reporting period to the time of payment for there to be an accrued expense (for accounting purposes). I think that's what's tripping your thought processes.

Eg. Quarterly reporting period (every three months). Electricity bill is paid monthly. During the reporting period of July 1 - Sept 30:
* Used $500 worth of electricity in July.
* Received electricity bill for July on Aug 7th.
* Paid bill on Aug 8th.
* At the end of the reporting period on Sept 30, the expense pertaining to the July electricity usage is not outstanding - it has been both incurred *and* paid... and is thus not accrued... thus there is no need to make a balance day adjustment regarding it.

I looked at what you said and I find that the likely reason for my mistake. However, shouldn't the "different reporting period" statement be made in the definition of an accrued expense? In the textbook, all it says in the definition is: "An expense that has been incurred but not yet paid"

But thanks to both of you.

Yes, but this is in the context of balance day adjustments, which are always only considered at the end of a reporting period. Accounting for accrued expenses is a balance day adjustment.


I obviously don't have that textbook, but from what you've said... it does seem to be a bit poorly explained... I hope you get it now, though

[luffy]

For simplifying purposes, as long as the payment is made IN the same reporting period it is classified as a 'normal' expense which is why in this scenario the $1200 payment is an expense (yes in reality it is a post-paid payment but in VCE accounting it isn't)

Actually, in reality, it's a "normal" payment too...

AvO's correct in all other respects though.

Just to rephrase it: The concept is that if an expense is not paid for in the same reporting period in which it is incurred, then it is "accrued". An expense is not accrued simply because you pay your bill after you've used the electricity... the time of use (incurred) must be in a different reporting period to the time of payment for there to be an accrued expense (for accounting purposes). I think that's what's tripping your thought processes.

Eg. Quarterly reporting period (every three months). Electricity bill is paid monthly. During the reporting period of July 1 - Sept 30:
* Used $500 worth of electricity in July.
* Received electricity bill for July on Aug 7th.
* Paid bill on Aug 8th.
* At the end of the reporting period on Sept 30, the expense pertaining to the July electricity usage is not outstanding - it has been both incurred *and* paid... and is thus not accrued... thus there is no need to make a balance day adjustment regarding it.

I looked at what you said and I find that the likely reason for my mistake. However, shouldn't the "different reporting period" statement be made in the definition of an accrued expense? In the textbook, all it says in the definition is: "An expense that has been incurred but not yet paid"

But thanks to both of you.

Yes, but this is in the context of balance day adjustments, which are always only considered at the end of a reporting period. Accounting for accrued expenses is a balance day adjustment.


I obviously don't have that textbook, but from what you've said... it does seem to be a bit poorly explained... I hope you get it now, though

Could you just explain one thing to me which doesn't seem to actually make sense?

Why was _avO wrong? I've always found accounting to be a "logical" subject and everything in the textbook seems to be the most "logical" way to approach the problem. Thats why in this case, wouldn't electricity, which was consumed in the same reporting period, still be an accrued expense in reality? Sorry, it just doesn't make sense that electricity paid after consumption, is treated as a simple expense and not accrued. Haha. Sorry, I'm just confused and it doesn't make sense (to me).

[Fyrefly]

I took "in reality" to mean: how real accountants deal with this.

And, while a lot of VCE accounting doesn't match up to real-life accounting, this is one issue that does. The balance day entries are a little different, but the differences are down to semantics. The core concept is exactly the same: VCE accounting does actually properly teach you how to deal with accrued expenses. It is in this sense that I disagreed with avO's comment that "yes in reality it is a post-paid payment but in VCE accounting it isn't".

Also: if you take your accounting studies further than VCE, you'll come to realise that some things about accounting completely defy all logic. VCE accounting is very simplified, and thus seems relatively logical. But accounting isn't a science...

[luffy]

I took "in reality" to mean: how real accountants deal with this.

And, while a lot of VCE accounting doesn't match up to real-life accounting, this is one issue that does. The balance day entries are a little different, but the differences are down to semantics. The core concept is exactly the same: VCE accounting does actually properly teach you how to deal with accrued expenses. It is in this sense that I disagreed with avO's comment that "yes in reality it is a post-paid payment but in VCE accounting it isn't".

Also: if you take your accounting studies further than VCE, you'll come to realise that some things about accounting completely defy all logic. VCE accounting is very simplified, and thus seems relatively logical. But accounting isn't a science...

Thanks a lot for your help Fyrefly. Yeah, the VCE accounting design seems to be highly simplified as it isn't very difficult to understand (perhaps because it seems logical). You have got me curious about the "real life" side of accounting now. Haha.