Should I make an accrual for this payment?

[Uyux]

Hello everybody,
I have been having a long discussion with my colleagues at work regarding whether we should accrue or not this payment:
Our organization just closed its fiscal year on 30 September 2019 and during the month of October we were recording the last transactions, including accruals. During the last quarter of our fiscal year, the HR Department has been in contact with a supplier to acquire a new software to assist us in the monthly payroll calculations. After a few conversations and meetings with the supplier, on 30th September 2019 (the last day of our fiscal year), we signed a contract with this supplier for the development and implementation of this new software in my company. The contract stipulates, that on the same day of the contract's signature, there must be a payment of a first installment for a value of the 30% of the contract (a payment of around 10,000 USD).
My question is if you consider that I should record an accrual for this amount at the end of our fiscal year. Thank you very much in advance for your help.
Uyux

 

[Fidget]

Yes, it's an accrual at year end for the amount due. But it's also a prepayment since it relates to costs that will be incurred in the next period.

 

[Uyux]

Thanks Fidget. So if I understand you correctly, I should be recording on 30th September 2 transactions:

1st transaction) Debit Expenditure - Credit Accruals
2nd transaction) Debit Prepayment - Credit Bank

I understand that I have to record the 2nd transaction because there was an actual payment that I have to register in my Accounts, however, I do not fully understand why I have to recognize 30% of an expenditure that as of 30 September, it still did not happened. Can you please help me to clarify this point? Thank you very much.

Best regards,
Uyux

 

[Fidget]

The reason you need to recognise it in the year end accounts is because the contract states that 30% of the full amount needs to be paid on the day the contract is signed. That means the company is liable for that amount on that date. Therefore it needs to be shown in the accounts for y/e 30 Sept. So you need to:

Dr Expenditure
cr Accruals

To take it back out of your y/e 30 Sept accounts and into prepayments you need to:

Dr: Prepayments
cr: Expenditure

If the amount had actually been paid on 30 Sept, then it would already be in the accounts so you wouldn't accrue for it because it's already been paid. You would just have to do the prepayment adjustment.

When the amount is actually paid, you'll

Dr Accruals
cr Bank

Then as the prepayment is used up as work commences in the new period, you'll

Dr Expenditure
cr Prepayments

 

[Uyux]

A very accurate answer Fidget, thanks a lot