Accruals and Reversals: A Guide to Accurate Budgeting

Accruals and reversals can be tricky to get right, but understanding the basics can make all the difference. Accruals are essentially expenses or revenues that have been earned or incurred but not yet received or paid.

In a typical business, accruals can arise from things like prepaid rent or utility bills. For instance, if you pay your rent for the next quarter upfront, that's an accrual that needs to be accounted for. You can't just forget about it and claim you haven't paid rent for that period.

Accruals can be recorded on the balance sheet as either assets or liabilities, depending on whether they're related to revenues or expenses.

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Accruals are a way to record expenses or revenue that have been incurred or earned, but not yet recorded in the company's financial statements. This can include unpaid invoices for services provided or expenses that have been incurred but not yet paid.

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An accrual is necessary when an expense is incurred in one accounting period but not paid until a future accounting period. For example, if a purchase order is placed on June 1 for lab equipment and the equipment is received on June 28, an invoice for $3,000 is received on July 1 and is paid on July 30.

Accruals can also be necessary for expenses that are incurred over a period of time. For instance, if an electric bill for 701 Carnegie is received on July 15 in the amount of $6,000, an accrual would be necessary as of June 30 for $4,000, as 2/3 of the time of service occurred in June.

Accruals are recorded through adjusting journal entries at the end of each accounting period, and they impact both the balance sheet and the income statement. The offset to an accrued expense is an accrued liability account, which appears on the balance sheet.

Here are some key points to keep in mind:

Accruals are not just a one-size-fits-all concept, but rather a category of accounting entries that can be applied in various situations. There are several types of accruals recorded by companies and organizations, including those mentioned in Example 4: Receipt Accruals, Budget Office Accruals, Central Service Provider Accruals, and Controller's Office Accruals.

Receipt Accruals, as seen in Scenario 1 of Example 3, involve recording expenses for goods or services received but not yet invoiced or paid. This ensures that the expense is properly accounted for in the current fiscal year.

Budget Office Accruals are another type of accrual, which involves recording expenses for services or goods received but not yet invoiced or paid. This type of accrual is often used in conjunction with Central Service Provider Accruals.

Central Service Provider Accruals, as seen in Scenario 2 of Example 3, involve recording expenses for services or goods received but not yet invoiced or paid. This type of accrual is often used when services are provided over a period of time.

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Controller's Office Accruals involve recording expenses for services or goods received but not yet invoiced or paid. This type of accrual is often used in conjunction with other types of accruals to ensure accurate accounting.

In addition to these types of accruals, there is also Accrued Interest, as seen in Example 5. This involves recording interest expense on financial statements even though interest on bonds is typically paid semi-annually.

The following table summarizes the types of accruals mentioned:

Accruals are the basis of the accrual method of accounting, which is preferred by generally accepted accounting principles (GAAP). This method allows companies to record revenue that's been earned but not yet recorded in the general ledger and expenses that have been incurred but are also not yet recorded.

Accruals greatly improve the quality of information on financial statements by including amounts that would otherwise be missed. Before accruals, accountants only recorded cash transactions, which don't give information about important business activities like revenue based on credit extended to customers or a company's future liabilities.

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The use of accrual accounts allows a company to measure what it owes in the short term and what cash revenue it expects to receive. It also allows a company to record assets that don't have a cash value, such as goodwill.

Accrual accounting is widely considered to provide a more accurate and comprehensive view of a company's financial position and performance than the cash basis of accounting.

Here's a summary of the key benefits of accrual accounting:

Accruals are a crucial aspect of accounting, and knowing when to use them is essential for accurate financial reporting. An accrual is necessary when an expense is incurred in one accounting period but not paid until a future period. This is a requirement of GAAP-based accounting.

Accruals can be tricky to understand, but let's break it down with some examples. According to Example 3, Scenario 1, a purchase order is placed on June 1 for lab equipment, and the equipment is received on June 28. An invoice for $3,000 is received on July 1 and is paid on July 30. An accrued expense of $3,000 must be recorded as of June 30 to ensure that the expense is properly accounted for in the current fiscal year.

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When to use accruals can be determined by looking at the dates of the transaction. If the expense is incurred before the end of the accounting period, an accrual is necessary. For instance, in Scenario 2 of Example 3, an electric bill for 701 Carnegie is received on July 15 in the amount of $6,000. The dates of electric service are from June 10 – July 10. An accrual would be necessary as of June 30 for $4,000, as 2/3 of the time of service occurred in June, and 1/3 occurred in July.

Accruals are recorded by debiting the expense account and crediting the accrued expense liability account, which appears on the balance sheet. This ensures that the transaction is recognized in the accounting period when it was incurred, rather than paid.

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Accruals at Princeton University can be complex, but understanding the different types can help you navigate the process. There are four types of year-end accruals recorded by the University.

Receipt Accruals are done automatically by the system and are usually necessary when a department needs to record a transaction that meets the accrual criteria. Budget Office Accruals are done by request by the department and in collaboration with their budget office analyst.

Budget Office Accruals are usually non-PO accruals for activities that have taken place prior to June 30. These accruals must be submitted and approved by the budget office by 12:00 p.m. on July 3.

Controller's Office Accruals are recorded by the Controller's office during the year-end financial statement process. These accruals are generally calculated by reviewing significant payments made after year end and determining if the related expenses occurred in the current fiscal year or the next fiscal year.

The Controller's Office accruals are charged to a special Controller's office department, rather than departments and projects. This helps ensure that expenses are accurately accounted for in the correct fiscal year.

Here are the four types of year-end accruals recorded by the University: