Purpose of Cost Accruals

Cost Accruals are used to recognise expenses that have been incurred but not yet been invoiced. Accruals should be posted to the period in which the goods or services were incurred, so accounts accurately reflect revenue earned in that period and expenses incurred in generating that revenue. In some cases, accruals extend over several periods, necessitating a Reversing Journal on the first day of the next period. 

Examples of Cost Accruals include:

• Contractor Work in Progress like services rendered but not yet billed by the Supplier where you expect to pay at a later stage. 
• Goods received but not yet invoiced, like goods dispatched or partial deliveries.
• Utility costs invoiced bi-monthly in arrears.
• Insurance where the Supplier bills for two or three months in arrears but the Invoice might not appear until month four. 
• Interest owed.
• Expenses not yet paid.

Setting up Accrual Journal entries

When setting up an Accrual you should proceed as if the Supplier Invoice were present and accrue expected costs as follows using your best estimate for the details:

• Credit the total to a nominated Cost Accrual (System) Account in the Balance Sheet for the period/s you receive the goods or services.
• Debit the estimated costs to each of the relevant General Ledger Expense Accounts.

See:

Managing General Ledger Accounts 

Creating General Ledger Journals 

Cost Accruals - Part 1 (7.4) - AIQ Academy

Cost Accruals - Part 2 (7.5) - AIQ Academy 

You can set up multiple Balance Sheet Accrual (System) Accounts in your General Ledger to differentiate between different accounts. This will help with subsequent Balance Sheet query and analysis reporting. For example, you can set up Accrual Accounts for:

• Different Utilities (some Utilities might bill Quarterly while others bill bi-Monthly).
• Contractor or Supplier Work in Progress.
• Interest owed.

Step One: Create Balance Sheet Accrual Accounts

Setting up an accrual account follows the same steps as a standard General Ledger Account. See Managing General Ledger Accounts for more details. Assigning a Group will let you query them in the GL Accounts listing grid. 

Step Two: Nominate the Accrual Accounts as System Accounts

1. Go to Setup > Codes Maintenance > System Accounts.
2. Click Add New System Account.
3. In the Account Type dropdown, select Cost Accrual Account. 
4. In the Linked GL Account dropdown, select the Balance Sheet Account that you created above.
5. Click Save.

1. Go to GL > GL Journal Manager and select Cost Accrual.
2. In the header, complete the following as relevant: 
   • Cost Accrual A/C: This is the Balance Sheet Accrual Account which will hold the credited Accrued Amount until a reversal occurs.
   • Description: Enter a meaningful description of the transaction, such as "Accrued Interest for April 2018". 
   • Default Description in each line: Check if you want Line Description to inherit this text.
   • Journal Reference: Enter a Journal Code or Number to distinguish this Journal from other transactions.
   • Date: This is important as it determines the Start Period in which the Accrual journal will be posted.
   • Manual Reversal: This lets you manually reverse this accrual from the journal management screen. This will auto create a reversing entry for the accrual in the current period.
   • Watch This Supplier A/C For Suggested Reversal: Instead of choosing to auto reverse, you can watch a supplier account for potential invoice matches against this accrual and then used to reverse it via the Journals Management screen. When the Invoice arrives in this Supplier Account, the system labels possible matching invoices for a reversal.
   • Auto Reverse at Start of Next Period: You can use this method of Accrual Reversal rather than matching against a Supplier Invoice, for example, for "Work in Progress" type Accruals, and regular accruals where you fully expect the Invoice to appear in the next period. 
   • Until: Choose to make this journal recurring by either creating a draft journal each time it recurs or auto posting it. Decide whether the journal can recur over a set number of periods and indicate whether it should continue up to a certain date or indefinitely.
   • Every:  Set the recurrence frequency of the accrual journal after the Period specified by the Accrual Date. For example, enter one if the accrual should repeat every period up to the end period, or enter three if it should repeat every three periods up to the end date.
3. Complete the line details:
   • GL Account: This is the General Ledger (posting) Accounts(s) that you will post the Accruals to.
   • BI Code: Enter the relevant BI Code associated with this Accrual journal for reporting purposes
   • Line Description: Enter or Overwrite the Description of the Accrual.
   • DR Amount: The debit amount of the journal. 
   • Export to Excel: Click if you wish to retain a copy of the journal in Excel.
4. Click Process. You will be asked to confirm the posting.

Go to GL > Cost Accrual Manager.

The Cost Accruals Manager grid lists all Cost Accruals awaiting reversal for a selected financial period, allowing you to manage them on a period-by-period basis.

The grid displays the following details:

• Reference: The grid displays a single Transaction ID for each accrual. It can span over multiple periods. Click this link to open the Transaction Browser. In the Transaction Browser, you can further drill down or edit by clicking the pencil icon. If you change the GL Account code, this will update all the lines in the journal. 
• Total Accrued to Period: The overall amount accrued for the selected period.
• Total Reversed to Period: The total reversed for the selected period.
• Remainder to Reverse: The amount that remains to be reversed up to the end period of the accrual. 
• Reverse Against Invoice: A 'Yes' label if any invoices posted in the selected period against GL accounts match any outstanding accruals.

When the Supplier Invoice arrives, post it, letting it be matched with any previous accrual postings. If both entries correspond fully: 

• The costs will post to the P&L in the correct period.
• The Invoice totals will post to the Creditors Control Account in its proper period. 
• A contra entry will post to the Balance Sheet Cost Accrual Account to clear it out.

Complications can arise if:

• The posted Accrual amounts differ from the Supplier Invoice amounts. For example, if the Supplier Invoice Amount is greater, you will have to adjust the Reversal Accruals to ensure that the correct costs enter the P&L in the correct period. However, the result will be an under-accrual balance in the Accrual Balance Sheet Account. 
• The Expense and/or Cost Centre Postings differ from each other. 

Reversals will either be created automatically or manually using credit journals posted against the current period as described in the next section.

There are two ways to reverse Accruals.

Method One: Auto Reversing

This method is mostly for Work in Progress which you will re-estimate at the end of the period. When you process the Accrual, the following will automatically be generated:

• Accruals for the relevant period.
• Cancelling Accruals in the next period. 

Method Two: Manual Reversing 

1. Go to GL > Cost Accruals Manager and find the relevant accrual.
2. In the Actions dropdown, select Reverse to open the Reverse Accrual screen.
3. The Reverse Accrual screen displays full details of the accrual up to the current period, including:
   • The total amount already reversed.
   • The remainder to reverse, split by GL/BI code(s).
   • The period the reversal will be posted in.
   • Details of all matching invoices, including period dates and BI Codes. 
     
     Decide how much of the accrual you need to reverse in this period. The invoice amount may match the amount accrued for. If the invoice is only a partial charge, you can carry the remaining value into the periods in which you expect to be invoiced. Enter the amount in the Reversal Amount column against each line of the accrual.
4. Click Process to post a reversing journal that reverses the value of the accrual to that period date. The reversing journal will be posted in the period selected.