At the end of each month or other period, it is the bookkeepers or accountants job to make entries and prepare financial statements. When using accrual accounting, it is necessary to book for items that are incurred in the period, but have not been paid. Some companies consult with professional Financial Advisors in Perth that are experienced in accounting & finance field.
Supplies and other expenses are booked when the item is received, and purchased services are booked when the service is complete. These items still must be booked even if an invoice has not been received in accounts payable.
Payroll has specific challenges, since the salaries related to time worked must be booked even if the payroll period has not ended. Specific instructions on payroll accruals system can be found here.
Booking the Liability Accrual
The entry to book an accrual is a simply two sided entry. For example, when a supply has been received but the invoice has not been received in accounts payable at the end of January:
- Debit Supply Expense $500
- Credit Accrued Expenses $500
The liability shows on the books at January month end.
What happens in the following month (February) can be an issue. A reversing entry must be booked in the next month.
- Debit Accrued Expenses $500
- Credit Supply Expense $500
The reason for the reversing entry is to avoid double booking the expense. If the reversal is missed, the payment is made in the February with this entry
- Debit Supply Expense $500
- Credit Cash $500
will result Supply Expense being overstated by $500, and there would be a $500 balance in Accrued Expenses that would never go away.
Credit Balances in Expense Accounts
There may be an instance where an accrual entry is made, the reversing entry is recorded the following month, but the payment is never made for the expense, possibly because the item was returned. The expense may turn out to be lower than the accrual, if there is a partial return or savings are achieved on pricing after the accrual is booked.
This will result in a credit balance for the following month (February), since the amount that is reversing out will be greater than the amount of expense booked. The account will still be correct for the year to date financial statements.
If this situation happens in the December to January time frame, the credit balance will remain on the January books, since December is closed. The books are still correct, since the accrual was made with the information that was available at the time; it simply is going to require more explanations until the credit balance goes away.
Some accounting systems can automatically process reversals. The journal entry in the first month must be identified as a reversing entry.