SAP B1 blog

Of the annual accounts has its very own pitfalls. One of the most intriguing challenges is the timing of business transactions. After all, anyone who thinks that expenses equal payments and income equals deposits probably also has a very optimistic tax advisor. When it comes to advance payments or down payments in particular, it quickly becomes clear that in accounting, it is not the time of payment that matters, but the economic context. And this can - quite unspectacularly - extend beyond 31 December. In this article, we show why the topic of accruals and deferrals is not only mandatory, but also a touchstone for clean accounting - and how SAP Business One doesn't get in the way.

What is deferred income - and why is it so important?

in the company pays the January rent in December. A classic overbooking in the profit and loss account if you are not careful. Because expenses are not the same as payments. This is where accruals and deferrals come into play: they ensure that expenses and income are recognised in the income statement. period in which they are economically and caused not the one in which they paid were.

This involves two types of demarcation:

• Prepaid expenses and deferred charges (ARA): Advance payments for future services.
• Accrued expenses and deferred income (PRA): Payments received for services yet to be rendered.

Those who master this distinction not only prevent distorted annual financial statements, but also sleep more soundly - at least in terms of the balance sheet.

Prepaid expenses and deferred income explained clearly

Prepaid expenses and deferred charges (ARA)

Definition: Companies make payments in the old year for services in the new year. Typical: rent, insurance or interest.

Example: The January rent is paid in December. This payment does not relate to the old financial year, but to the new one. The solution: The payment is initially recognised as an expensebut then transferred to the "Prepaid expenses" account at the end of the year. It ends up in the balance sheet and not in the income statement for the previous year.

Accrued expenses and deferred income (PRA)

Definition: The company receives payments in the old year that relate to services in the new year.

Example: A customer transfers a down payment in December and the delivery takes place in January. Here too, revenue is initially posted, but neutralised again at the end of the year via the "Deferred income" account. The revenue belongs in the new year.

Implementation in SAP Business One

So far, so good - but how does it work? technical? SAP Business One provides (almost) all the tools you need for accrual accounting. You just have to make the coffee yourself.

Manual booking

Bookings can be made via:

Financial accounting → Postings → Journal entry

For ARA:

• Target: Prepaid expenses
• Have: z.e.g. rental expenses

For PRA:

• Target: z.E.g. rental income
• Have: Deferred income

Important: The G/L accounts used must be correctly created in the chart of accounts be. Anyone who messes up here will see it twice in the end.

Automation options

SAP B1 offers no automatic magic for demarcation. But there are tricks:

• Recurring postings → for monthly cancellations of ARA and PRA.
• Account templates → for standardisation.
• Add-ons such as Versino Financial Suite → significantly expand the functionality, e.g. with recurring entries and accrual plans.

Period allocation

About Administration → System initialization → Posting periods can be used to control which financial year a transaction belongs to. This is particularly important for ARA/PRA postings.

Accruals for provisions and other

A classic error in thinking: "It's also somehow shifted in time - so demarcation, right?" No, not always.

• Prepaid expenses and deferred charges: Payment/deposit in the old year, expense/income in the new year. Payment secure.
• Other liabilities/receivables: Expense/income in the old year, payment in the new year.
• Reset: Expense in the old year, payment in the new year, but amount uncertain.

In SAP Business One, the distinction is made purely via the G/L account:

• Other liabilities: z.E.g. account 1799
• Provisions: z.e.g. account 3090

If you don't know the difference, it's easy to write next year's insurance cover in the wrong financial year.

Reverse accruals and deferrals - how SAP Business One makes it elegant

The ARA and PRA items recognised will be reversed in the new year:

• ARA: posted again in January via the expense account (e.g. rent).
• PRA: in January via the revenue account (e.g. sales revenue).

SAP B1 also allows this to be taken into account at the time of the original booking - provided you think along with the customer.

For more complex scenarios over several years: write off items regularly or extraordinarily if necessary. This is also possible - with a little discipline.