An accrual is an accounting method of allowing the cost of a product or service to be included in the period of accounts that you are reporting on even if you have not received an invoice for that product or service. This not only helps in reducing your profit and, therefore, your tax liability for the current accounting period but also your accounts must be prepared to give a true and accurate reflection of the businesses performance for the period of time that they cover and posting an accrual is important to ensure this is the case.
I have known many accountants who do not use them and doing so certainly saves the accountant from devoting the time to calculate these but as I am going to demonstrate they are easy to calculate and record for double entry bookkeeping purposes and as such if your accounts don’t have any posted and you think they are needed I would certainly ask the accountant why they have not done this for you, please remember you sign the accounts as a true reflection of the business transactions and inaccuracies can cause you problems if they are found to be incorrect notwithstanding the fact that the accounts are also used for your tax return and you may be committing an offence if the tax return is incorrect.
As mentioned earlier an accrual is to report the expenses that have been incurred but you have not yet received an invoice so for example if you are having your accounts prepared then the accountancy fee would almost certainly be an accrual. The accounts are for the period of accounts and your accountant probably hasn’t raised you an invoice as they have not carried out the work. To post an accrual you would post a debit to the expense account, so for our example the debit would be to the expense account of accountancy fees which would show as an expense on the profit and loss account which increases the expenses and lowers the business profit and a credit to the creditors accrual account on the balance sheet, when you then receive the invoice and pay the bill then the transaction would be a credit to the method of payment, let’s assume that was the business bank account and debit the creditors accrual account, thus not showing on the profit and loss account again, it simply would remove the liability from the balance sheet.
Using double entry bookkeeping skills as you can see it is a very straightforward transaction and ensures the timing of the expense is correct.
Source by Derek Dale
