 In many companies, the topic of accruals resurfaces at the end of every period, usually as a variation on this

question asked by the CFO (Chief Financial Officer – oversees a company’s finance) or corporate controller:
o "Quarter-end is near.... Do you have any accruals that need to be included?"
o Most finance people would know what the CFO means here, and the CFO probably assumes the rest of the
business does as well, but that is often not the case.
 The question from the CFO could actually mean two things:
o Are there any expense accruals to be made,
o Or are there any revenue accruals to be made?

Accrued Expense / Expense Accrued Revenue / Revenue accruals

accruals
*Expense is the term for a cost *Revenue is the term used to
incurred in the process of describe income (money) earned
producing or offering a primary through the provision of a business'
business operation. primary goods or services,
You would make an expense accrual You would make a revenue accrual
when expenses have been incurred when goods or services have been
for which we have not yet delivered, in other words the revenue
received an invoice from a has been earned, but we have not
supplier. yet actually billed the customer.

*accrued
*incurred - Builds up to be paid or received in
- an accounting term that means a future period.
that all transactions, - Both assets and liabilities can
regardless of their nature, accrue over time.
must be recorded when they - Accounting adjustment used to
occur, but has not been paid track and record revenues that
yet have been earned but not
*invoice received, or expenses that have
- Time-stamped commercial been incurred but not paid.
document that itemizes and
records a transaction between
a buyer and a seller
 Using accruals allows a business to more closely adhere to the matching principle.

Invoice:
- An invoice is a bill you send to your clients outlining the work you performed, what they owe you for your
services and how they should pay you.
- This document is especially relevant to service-based business owners—so think of anyone from
photographers who bill for their shooting hours to legal firms that bill for time.
- Besides getting paid, there are many other reasons to send an invoice:
o To clearly outline the projects or services provided
o To keep track of business revenue for tax season
o To help forecast future income
o And to even leave a lasting impression on your clients, by adding a business logo, branding or leaving a
thank you note
 - And every invoice comes with its key components—ultimately, the things you need to outline in order to get
paid without a fuss.
- The most effective invoices always include the following sections:
o The header: Which includes a logo, contact information, invoice date, invoice number—
o and even the Amount Due for those who view the invoice at a glance.
o The body: Which includes the list items of the completed work,
o discounts offered, applicable taxes and Amount Due.
o The footer: This is where you’ll outline payment terms, due dates,
o preferred method of payments and thank you messages.
o Remember, equipping yourself with good invoicing practices is critical to your success.
- Not only does it help you get paid and look professional to your clients, it also helps you manage your
accounting and, ultimately, grow your business.

1.) Expense Accruals / Accrued Expense

 Let's start with the most common type of accruals: expense accruals.
 Accrued expenses are the opposite of prepaid expenses.
 In prepaid expenses, you record the right to receive future services that have already been paid for but not
consumed.
 In accrued expenses, you record the obligation to pay for services in the future that you have already
consumed.
o Here are some examples of expense accruals, and the related accrual journal entries.
i. Travel expenses that were paid by an employee out of their personal account, and have not been
claimed back from the company yet by the end of the accounting period.
- If the employee communicates in writing the nature and amount of the expenses to the finance
department, then an accrual can be made to correctly state the costs for the period by debiting
travel expenses in the profit and loss statement of income statement, and crediting accrued
expenses on the liabilities side of the balance sheet.
- When the employee then claims the travel expenses in the next period, no costs will be incurred
in that period, as the amounts were already accrued for.
ii. Outside services (such as legal services, advertising, or cleaning) that have been received during the
current period, but not yet billed to the company by the end of the period.
- An accrual can be made to correctly state the costs for the period by debiting outside services
expenses in the profit and loss statement or income statement, and crediting accrued expenses
on the liabilities side of the balance sheet.
- When the invoice does come in during the next period, the accrual amount can be reclassed to
accounts payable.
iii. Bonuses related to current year (or quarter), to be paid out next year (or quarter).
- Setting bonus targets, tracking progress, and processing payments is usually a cross-functional
responsibility between HR, finance and functional managers.
- An accrual can be made to correctly state the costs for the period by debiting employee bonus
expenses in the profit and loss statement or income statement, and crediting accrued expenses
on the liabilities side of the balance sheet.
- When the payments do take place during the next period, this will be a balance sheet to balance
sheet entry, where the accrual is debited and cash is credited.
b)
 We will now discuss the second example of outside services in more detail, with numbers and accrual journal
entries.
o This month, a maintenance company performed $900 worth of outside services for us.
o In the same month, you received $1200 worth of invoices, of which $400 related to last month's services,
and $800 related to current month services.
o Your budget for the month was $1000.
o The payment sent to the supplier is $600 in the current month.
o Which of these numbers should be recorded as the current month expenses?
i. Expenses should be recorded during the period in which they are incurred, so $900 is the correct
answer.
o Let me talk you through why the other options are incorrect, and subsequently talk you through the
related journal entries.
- The $400 related to last month's services was accrued last month and can now be released.
- The $800 of invoices received related to current month services will be booked into
P&L, but we will have to accrue an additional $100 for invoices to be received.
- This $100 is the difference between the $900 of work performed and the $800 of invoices
received for it.
o Having a copy of the full set of signed timesheets of the external vendor for the work he performed for
us would be a good basis to make the accrual calculation.
i. Having a budget of $1000 is a spending restriction, not a dimension of your actual income statement.
ii. If your budget was $1000 and only $900 of outside services was performed, then you underspent
$100 versus the budget.
iii. A payment to the supplier, of in this case $600, is a journal entry that only affects balance sheet
accounts, not expense accounts.
o This is the way that example looks in journal entries.
o Last month, $400 was recorded as a debit in outside service expenses in the income statement, and as a
credit in accrued expenses liability on the balance sheet.
o This month, when the invoices come in, the $400 is reclassed within the liability side of the balance sheet,
by debiting accrued expenses, and crediting accounts payable.
 You could also reverse the original journal entry to release the accrual, and then book expenses versus
accounts payable, which has exactly the same effect, but more journal entry line items.
o The $800 of invoices related to the current period are recorded by debiting outside service expenses in
the income statement, and crediting accounts payable on the balance sheet.
o For the $100 worth of work performed for which no invoice has yet been received, you record a debit in
outside service expenses, and a credit in accrued expenses.
o Last step: for the actual payment to the supplier, you debit accounts payable and credit cash.
 At the end of the current month, you have $900 of outside service expenses in the P&L, you have $100 in
accrued expenses on the balance sheet and $600 ($1200 minus $600) in accounts payable related to this
vendor on the balance sheet.
o Hopefully, the finance department of your company is well organized, and has a list of "usual suspects" for
accruals, so no material amounts are missed.
 But what if most of the expense accounting goes through manual accrual journal entries rather than systems?
o This could pose a control risk, as accuracy and completeness are at risk.
o For each of the earlier three examples, you could put a system in place with appropriate routines and
controls, if the number of accrual entries and related amounts are significant.
 o For travel expenses, you can implement a travel and living system with an automated feed to the general
ledger, and get all employees into the habit of feeding this system in real time.
o For outside services, it would be good to use a purchase order system, where you can record the receipt of
a service and receipt of the invoice for that service separately, match the related documents, and use the
list of open purchase orders for your accruals.
o For bonus target setting, progress tracking, and payment processing, a bonus tracking system can be put in
place.

2) Revenue Accruals / Accrued Revenue

 The second type of accruals is revenue accruals.
 Goods or services have been delivered by our company for which we have not yet billed the customer.
o Two examples.
i. If you are in the service business, you may have performed work to a client under an existing
contract for which you have not billed yet by the end of the period.
- You could record this, assuming revenue recognition criteria are met, by debiting the unbilled
revenue asset account on the balance sheet, and crediting revenue in the income statement or
profit and loss statement.
- If you ship goods at the very end of the period, after the subledger has fed its data to the
general ledger but before the period is over, you could record these shipments by debiting the
unbilled revenue asset account on the balance sheet, and crediting revenue in the income
statement or profit and loss statement (once again this only applies when revenue recognition
criteria are met).