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.
The aim is therefore to determine the exact profit for the period of a company, for which these accruals and deferrals are absolutely necessary. As there are often time differences between inflows and outflows or income and expenditure, discrepancies can arise as to which of the periods the company's profit should be attributed to. The procedure ensures that the taxes for a specific accounting period can also be properly paid to the tax authorities.
The exact time or date of the cash flow is not important for accrual accounting. Instead, it is about the time periods in which expense types or income types were incurred (old financial year) or will be incurred (new financial year).
Accrued income and prepaid expenses
The main feature of deferred income is that payments (income or expenses) are made during the current financial year (before the balance sheet date). The corresponding service 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
Accrued income is the reverse of deferred income: payments are made in the old financial year and therefore before the balance sheet date. The income or expenses are then only recognised 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 recognised when a company incurs expenses in the current financial year for the next financial year. Prepaid expenses are therefore characterised by the following features:
- Issued before the balance sheet date
- Expenses 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 to the new financial year.
As at the balance sheet date, the paying Business partner recognise the expenses attributable to the new financial year as prepaid expenses on the assets side of the balance sheet. If new accounting periods have begun, all prepaid expenses must be cancelled by transferring them to the corresponding account for the new period.
Deferred income
Deferred income is recognised when a company's business partners (e.g. customers) incur expenses 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 financial year
On the balance sheet date, the company must recognise the income attributable to the new financial year as deferred income on the liabilities side of the balance sheet. If a new period has begun, the deferred income must be reversed by transferring it to the corresponding account for the new period.
Automatic accruals in SAP Business One
With the Versino Financial Suite stands for SAP Business One a tool for correct invoice accruals and deferrals. This gives you the option of creating accrual postings for both purchase and sales invoices by entering the actual accounting period. This is done automatically in the background when the invoices are added (or Credits).
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