Posting Accruals and Deferrals

Objectives

After completing this lesson, you will be able to:
  • Post accruals and deferrals manually
  • Post accruals and deferrals automatically

Accrual and Deferral Posting

Diagram explaining accrual and deferral postings with a house for accrued payments and a car for deferred transactions, showing timing differences for services and payments.

To ensure that expenses are posted to the correct period, enter accrual and deferral documents, and then reverse them in a later step. The reversal date of the original document is then regarded as the posting date of the reversal document. You can use a recurring entry program if you need to enter accruals and deferrals often.

Accrual Posting

Diagram explaining rent prepayment. Starts warehouse lease on 12/01, posts full expense 1500 in Period 12, accrual/deferral of -1000 on 12/31. Reversal posting of 1000 occurs on 01/01.

To understand the concept, consider the following example of a warehouse lease with a monthly rent of EUR 500. At the beginning of December, you pay 3 months' rent up front. You post the following accounting document:

  • Prepayment of rent: 12/01

    Posting: Debit - Occupancy costs 1500; Credit - Bank 1500.

By the last day of the year, you have only used the warehouse for a month. To show in your accounting books that you have already prepaid for two more months, you post the following:

  • Accrual or deferral posting: 12/31

    Debit - Accrued income 1000; Credit - Occupancy costs 1000.

At the beginning of the new year, you reverse the accrual posting:

  • Reversal posting: 01/01

    Debit - Occupancy costs; 1000 Credit - Accrued income 1000.

Accrual Posting of Expenses

Diagram of expense accruals and deferrals over periods. An invoice of 120 is evenly distributed in 12 periods, with 6 as accruals and 6 as deferrals, each with an expense of 10 per period.

Expenses and revenue posted in one period can often originate in another period. For this reason, expenses and revenue have to be accrued or deferred. They are distributed to the periods from which they resulted.

Accruals and Deferrals

The following distinction is made between accruals and deferrals:

  • Accruals: Financially, expense and revenue belong to the current period and are only posted to a subsequent period once an invoice has been received or issued.

  • Deferrals: Expense and revenue are posted to the current period upon receipt and issue of an invoice, but financially they belong, at least partially, in a future period.

Accruals and deferrals can be managed differently in Financial Accounting (FI).

The figure shows an example of an invoice that is received in the seventh period and that is also posted there. Because this invoice was created for goods that are used throughout the year, the expenses worth 120 have to be distributed equally across all periods. Therefore, for the first six periods, six accruals to the amount of 10 have to be created. An amount of 50 has to be distributed to the last five months after receipt of the invoice.

Accrual Posting – Manage Recurring Journal Entries

Diagram of a recurring journal entry with specific rules, items, positions, and update status steps. Shows entries for expenses and other payables on specified posting dates and their status.

You must create accruals when an expense or revenue will be received in the future but is incurred or earned, either partly or completely, in the current period. The recurring entry program is suitable for posting accruals, since the exact same amount is posted to the same accounts in each period.

In each period, the posting record is Expense to Other Payables (or Provisions).

Booking of an Accrual as an Expense

The booking of an accrual as an expense is posted to the account in following ways:

  • Other payables: If you are certain about the reason and amount of the accrual.

  • Provisions: If you are uncertain about the amount and/or reason of the accrual and can only estimate it.

For each period in which you carry out accruals, the credit balance on the Other Payables (or Provisions) account increases.

Post Accruals

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