Subject: Question About Accrual Cash Entry
Hi everyone,
I hope you can help me clarify something. I’m currently dealing with a fund that recorded a December 31, 2023 accrual entry of $8,000 to accrued expenses and $8,000 against cash. This seems a bit unusual to me. The client has already paid two expenses totaling $7,715, but the invoices for these costs won’t come in until the second half of the year, which makes the December accrual puzzling.
Even if I were to adjust the entries to reflect the invoices against the accrual, I would need to reconcile the remaining $285, and I’m unsure how to do that against cash. I’m feeling a bit confused about the whole situation. Could anyone help me figure out what I might be missing?
Thank you!
One response
It sounds like you’re navigating a somewhat unconventional situation with the accrual entry. Typically, accrual Accounting involves recognizing expenses when they are incurred, rather than when cash is paid. In your case, the entry of $8,000 to accrued expenses suggests that the fund anticipated certain expenses that would be recognized in the future, even if the actual invoices have not yet been received.
Here are some points to consider:
Understanding the Accrual: The accrual entry indicates that the fund expected to incur $8,000 in expenses related to future invoices. This is a common practice for matching expenses with the period they relate to, regardless of cash movement.
Recorded Expenses: Since the client has already paid $7,715 towards these expenses, it means they recognized part of the expected expense upfront. After you book these actual payments against the accrual, you’ll have a remaining balance of $285 in accrued expenses.
True-Up Process: To adjust for the remaining $285, you don’t need to decrease cash. Instead, you can reduce the accrued expenses account directly. You would make a journal entry to debit the accrued expenses for $285 and credit the appropriate expense account.
Final Entry Example: After recording the invoices and the amounts paid, your entry might look like this:
Credit Expense Account: $285 (this will clear the accrual balance and move the remaining expense)
Consideration for Financial Reporting: Ensure that the financial statements reflect accrued expenses accurately in the period they were incurred to adhere to the matching principle.
If your client has a reason to accrue the full estimate of $8,000 even without invoices, it could be for better financial insight or to adhere to specific policies. However, if you have any concerns about the appropriateness of the accrual, it’s worth discussing with the client or consulting with an Accounting professional to confirm that this approach meets their internal and external reporting standards.