Setting Up the General Ledger to Display Accruals and Deferrals

Objective

After completing this lesson, you will be able to explain the concept of accruals and deferrals

Accruals and Deferrals

Introduction

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.

Accrual and Deferral Postings

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).

This image refers how the timing and handling of service and payment can either be an accrual or deferral.

Accrual:

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.

Deferral (Prepayment):

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.

Manual Accrual

Introduction

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

Post and Reverse a Manual Accrual

The image shows that posting a manual accrual involves recording an expense in the current period that will be reversed in a future period. This process ensures that expenses are accurately reflected in the financial statements, with the reversal posting correcting the accrual in the subsequent period.

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.

Post and Reverse a Manual Accrual

The image illustrates the process of posting estimated costs at the period start and reversing the posting at the period end.

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.

Recurring Entries for Posting Accruals with the Same Account and Amount

Introduction

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

Recurring Journal Entry

The image illustrates the Recurring Journal Entry that allows for automated posting of journal entries based on a predefined recurrence rule, such as monthly on the first day. This ensures consistent and timely recording of transactions, like expenses and provisions, without manual intervention.

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

Create a Journal Entry with Auto-Reverse

Practice yourself using the interactive simulation to post and reverse a journal entry at the month-end by using the SAP Fiori apps Post Journal Entries, Schedule General Ledger Jobs and Manage Journal Entries.

Prerequisites

Whenever ### is used in this exercise, replace it with your group number, for example 001.

Create a Recurring Charge

Practice yourself using the interactive simulation to create and post a recurring charge by using the SAP Fiori apps Manage Recurring Entries, Schedule General Ledger Jobs and Manage Journal Entries.

Log in to track your progress & complete quizzes