Apply invoice accrual correctly.
29 Aug

Apply accruals correctly

Accrual accounting is an essential accounting task when it comes to the period-end closing, for example when preparing the Annual financial statements. Expenses and income must always be allocated to the economic periods in which they were incurred.

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It is therefore a question of determining the exact period profit of a company, for which this very accrual accounting is absolutely necessary. Since there are often time differences between inflows and outflows or income and expenditure, discrepancies can arise as to which of the periods the company profit is to be attributed to. The procedure ensures that the taxes for a specific accounting period can be properly paid to the tax authorities.

Accrual accounting is not about the exact time or date of the cash flow. Instead, it is about the time periods in which expense types or income types have been incurred (old financial year) or will be incurred (new financial year).

Accrued income and prepaid expenses

The essential feature of deferred income is that payments (income or expenses) are made during the current financial year (before the balance sheet date). The associated management then only takes place during the current financial year.
Depending on whether the transaction is income or expense, a distinction is made here between:

  • Accrued income and prepaid expenses (ARAP)
  • Deferred income (PRAP)

Accrued income and prepaid expenses

In the case of accrued income, the situation is the opposite of that of deferred income: the services are rendered in the old financial year and thus before the balance sheet date. The income or expenses are then only booked during the new financial year.
Depending on whether the transaction is income or expense, a distinction is made here between:

  • Other liabilities
  • Other receivables

Prepaid expenses 

Prepaid expenses are formed when a company incurs expenses in the current financial year for the next financial year. Prepaid expenses are thus characterised by the features:

  • Issued before the balance sheet date
  • Expenditure in the new financial year

The purpose of prepaid expenses is to identify exactly which part of the payment made is attributable to the old financial year and which part is attributable to the new financial year.

As at the balance sheet date, the paying Business partner show the expenses attributable to the new business year as prepaid expenses on the assets side of the balance sheet. Should new accounting periods have started, all accrued income and prepaid expenses must be reversed by transferring them to the corresponding account of the new period.

Deferred income 

Deferred income is recognised when a company's business partners (e.g. customers) make expenditures in the current financial year for the next financial year. The company thus enters into a performance obligation. Deferred income therefore has the following characteristics:

  • Revenue before the balance sheet date
  • Earnings in the new business year

As of the balance sheet date, the company must show the income attributable to the new business year as deferred income on the liabilities side of the balance sheet. If a new period has started, the deferred income must be reversed by transferring it to the corresponding account of the new period.

Automatic accruals in SAP Business One

With the Versino Financial Suite stands for SAP Business One a tool for the correct accrual of invoices is available. This gives you the option of creating accrual postings for both purchase and sales invoices by entering the actual accounting period. This happens automatically in the background when the invoices are added (or Credits).

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