Setting Up the General Ledger to Display Accruals and Deferrals

Greg needs an introduction as to what accruals and deferrals are from an accounting perspective as he's not familiar with this concept.

Secondly, as part of the close process he needs guidance on posting journal entries to record accruals or by using recurring entries. He needs to learn what Apps are used in the SAP system to record these transactions.

During the close, the accounting department needs to identify, in line with accounting practices, any accruals or deferral (prepayments) that need to be recorded in the general ledger, in accordance with GAAP (Generally Accepted Accounting Practices).

An accrual is an expense or revenue that is recognized (i.e., belongs in the current period) but the invoice has not been received or issued. An example of this would be rent for a building that was due in the current accounting period but was not paid. For this reason, such revenues and expenses must be accrued; that is, they must be divided over the periods in which they are incurred.

In contrast, a deferral is an expense or revenue posted in the current period (invoice sent/received), but the actual business transaction, or part of it, is actually incurred in a future period. An example would be insurance paid in one period that covers the whole Fiscal Year, or an advance payment from a customer for services not yet performed.

Now that Greg has an insight into accruals and deferrals, he wants to see how they can be recorded in the SAP system.

To ensure that expenses or revenues are posted to the correct period, you can enter accrual and deferral documents by means of a journal entry or use the Upload General Journal Entries app, and then reverse them in a later step.

The above example refers to the prepayment of a warehouse lease paid on a quarterly basis. In period 12 we pay the full expense of EUR 1500 for periods 12, 1 and 2.

For period 12 we post an accrual for EUR 1000, then reverse the posting in period 1. The result is that we only report the expense as EUR 500 in period 12.

The journal entry template to reverse a journal entry is selected when the journal entry is posted at month end. In the close there is a step to schedule a job to automatically reverse the journal posting in the next accounting period.

When the job is run, it selects journal entries with the same planned reversal date and reverses the postings of these journal entries based on the planned reversal date. You can display the reversal postings by using Manage Journal Entries app.

Greg can also use a recurring entry if there is a need to enter accruals and deferrals often.

Let’s go to the next topic and see how we can also use recurring entries to record accruals/deferrals.

Greg will learn about using a recurring entry to set up an accrual posting in the SAP system.

The recurring entry program is suitable for posting accruals since the exact same amount is posted to the same accounts in each accounting period.

The header or Recurrence Rule (see above) is where you specify the Start and End date, how often (monthly, quarterly etc.) and which day of the month the posting will take place. In each period, the posting record is Debit Expense and Credit Other Payables (or Provisions).

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

• 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