Accrual Query
My manager has requested that I start accruing for the cost of uniforms and increase the accrual each month. However, since the uniforms haven’t been ordered yet and the expense hasn’t been incurred, I believe I shouldn’t be accruing for this at the moment. The intention behind spreading the expense across multiple months is to manage the costs when they are eventually incurred. Is this practice permissible?
One response
Your instinct is correct—according to Accounting principles, particularly the matching principle, expenses should be recognized in the period in which they are incurred, not before. Since the uniforms have not been ordered and the expense has not yet been incurred, accruing for this expense would not typically be appropriate.
Accrual Accounting aims to match revenues to expenses in the period they are realized or incurred. If there are no uniforms ordered yet, there is no obligation that has been recognized as a liability, which makes accruing for this cost questionable.
If your manager wants to spread the expense over multiple months for budgetary reasons, it may be more appropriate to consider a different approach, such as budgeting or forecasting, rather than accruing an expense that has not yet occurred.
You might want to discuss this with her, explaining the proper Accounting treatment and suggesting that once the uniforms are actually ordered and the expense is incurred, then an accrual can be made. It’s essential to maintain accurate accounting records to comply with accounting standards and ensure that financial statements reflect the true financial position of the company.