First there was train spotting, today we'll invent accrual spotting. I've never understood the draw to train spotting. I've lived in England where a lot of people do it, and I just don't get it. Anyway, let’s talk about what kinds of transactions would be directly affected by the accrual method and how to spot them.
Some of the more common ones are:
Accounts payable, Accounts receivable, Payroll, insurance, interest expense, interest revenue, prepaid expenses, and unearned revenue. There are of course many more instances that we could talk about, but one only has so much time, right?
So here is how to tell if we need to accrue something. Ask yourself the following question, "During the course of the transaction, were actions take to generate an expense or to earn revenue even though cash never traded hands?"
Let’s look at payroll for example. Let’s say that your employees work for you all during December and then get paid on January 5th for their work. If your books are going to be correct, you need to show the payroll expense in December as well as an accrued payroll liability account. So in this situation, something was done to incur expense, (employees did work for you), and you need to make sure that that expense gets put into the correct period that the work was performed.
So let’s get to the practical bookkeeping stuff now. If you are doing your books, you need to always be aware of when things are happening. When you sit down at your computer to enter the transaction, the accounting software is going to ask you for something called an "Accounting Date". This is the date that you tell the accounting software to recognize when the expense was incurred or when the revenue was earned. Do not confuse this with the payment date which is obviously when you make the payment in cash for the expense or receive payment for your work.
So how do you keep track of when things are happening. It's tough sometimes. A business usually has several things going on at once and it is very easy to forget to make an entry one month. What we do at Dashboard Accountants is make a list of all of the transactions that require us to make and adjust accrual entries. We keep this list in excel and then each period, we refer to it to make sure that we haven't left anything out. You must also be vigilant with paying attention to the dates on invoices that you receive. The company will usually put on the invoice when they did the work for you, which will help you out as your doing your data entry. As the superheroes of long ago would say on television, "It's a big job, but someone has got to do it."
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