Accruals are commonly used to move a transaction from one period to another without changing the net effect of the transaction. Please follow the advice of your management and CPA for guidance on whether or not to use accruals.
- To distribute expenses that don’t occur evenly throughout the year. For example, property taxes are usually paid quarterly. To spread the effect across all periods, additional entries are needed.
- To move a transaction to a future or prior period. For instance, a monthly rent payment may have accidentally been entered twice to June’s accounting period and skipped July.
An accrual journal entry will post the entry in the month input and reverse automatically the following accounting period.
Go to Accounting > General Ledger > Journal Entry
Example #1: Annual Property Tax Allocation
- Accrued Property Taxes (current liability)
- Property Tax Expense (operating expense)
To facilitate end of year settlement, it is recommended that each expense account is paired with a unique current liability account.
The journal entry for each period would be:
Debit Property Tax Expense $2,500
Credit Accrued Property Tax $2,500
Enter the tax invoices when they become available. The assigned period must fall within the same fiscal year as the monthly accruals. Instead of using the Tax Expense G/L account (as would be the norm for non-accrued items), use Accrued Property Tax to avoid overstating the expense.
- If the actual expense is equal to the accruals, the Accrued Property Tax account will have a zero balance.
- If the actual expense is higher than the accruals, the Accrued Property Tax account will have a debit balance.
- If the actual expense is lower than the accruals, the Accrued Property Tax account will have a credit balance.
Example #2: Monthly Rent Allocation
- Accrued Expenses (current liability)
- Rent Expense (operating expense)
Suppose a $6,000 rent expense is recorded in every accounting period. Due to a holiday weekend, July’s installment was entered early and posted to June, thereby overstating June’s expense and understating July.
Calendar period 0617: This entry removes the additional rent expense from June.
Debit Accrued Expense $6,000
Credit Rent Expense $6,000
Calendar Period 0717: The reversing entry adds the rent expense to July.
Debit Rent Expense $6,000
Credit Accrued Expense $6,000
Note that the Accrued Expense account will temporarily have a debit balance of $6,000 at the end of June. The balance is cleared out in July.