Record to report / R2R – General Accounting – Accruals
We started discussing accruals.
Accruals simply specify that we need to accrue certain expenses / incomes, though not incurred / received, but pertaining to the current period.
A very simple example is Bank interest. Let us say, the organization has deposited a sum of money in a long term deposit account (popularly known as a Fixed Deposit Receipt account in India), say for a period of five years, and the interest has to be paid at the end of the period. The interest on this account is compounding quarterly, so the interest keeps getting accumulated with the bank, it is computed each quarter and added to the original amount. It’s just that the bank will not pay this for five years. So, it will be prudent that the business also passes an entry, reflecting this interest in its income and creating a receivable for this amount from the bank in its books.
This would be a routine accrual entry.
In a back office process, the details of the contract for deposit will be provided to the provider, and the accounting personnel, will make an entry each quarter.
In some cases, this can be automated in the ERP system as well, if there is a module to handle the same.
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