Record to report / R2R – General Accounting – Accruals
We shared an example of accrued income.
Similar to accrued Income, we are quite aware of expenses accrued but not paid….
Insurance payments are a classic example, especially for plant and machinery, paid quarterly. There would be some amount paid during a fiscal period change.
Interest on unpaid EMI is another example. Here the principal and interest upto the date of close will be accrued, as it pertains to the period for which the book closure is being affected.
Some businesses like an electricity company would definitely need an income accrual process, as the expenses are incurred in the previous month, where as the billing gets delayed for the end of the period, normally a month. So to represent a true and fair view, the accrual mechanism is used.
Yes, utility companies maintain a big accounting team for accruals.
The same applied to construction companies, where the billing can happen only when a certain stage has been completed. So, accruals will be the order of the day, and a percentage of billing will be accrued for the book closure period or the defined period….
Thus Accruals are adjustments for revenues that have been earned but are not yet recorded in the accounts, and for expenses that have been incurred but are not yet recorded in the accounts. The accruals need to be added via adjusting entries so that the financial statements report these amounts.
Another interesting definition states – Short-term liabilities (such as interest, taxes, utility charges, wages) which continually occur during an accounting period but are not supported by an invoice or a written demand for payment. When preparing financial statements for that accounting period, such liabilities are estimated on the basis of experience (based on previous payments). Similar increases in the assets of the firm (which may also continually occur) is not taken into account in order to comply with accrual basis accounting rules.
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