Do you have questions about Accounting concepts? Here are a couple of common inquiries:
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Why did the client make last-minute entries and reversals on December 31st, and why were they done twice? Is this a typical practice? What might they be trying to achieve with entries like recording an expense followed by a reversal?
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Regarding accruals, when should you actually accrue something like the 2025 management fee? Does the timing of the accrual matter as long as it pertains to 2025? I assume it should be in January 2025.
One response
Certainly! Here’s a response to the two questions:
Last Minute Entries and Reversals: It’s not uncommon for clients to make last-minute entries and reversals, especially as they approach year-end. This practice can sometimes be used to fine-tune financial statements, ensuring that income and expenses are recognized in the appropriate period for accurate year-end reporting. For example, a client might record an expense on December 31 to reflect a liability incurred during the year, followed by a reversal in January of the following year to adjust their internal records or for budgeting reasons. This is often referred to as a temporary expense entry and is usually done for timing purposes, possibly to align with cash flow expectations or internal management reports. While it’s common, it should be done with careful consideration of the Accounting policies and GAAP (Generally Accepted Accounting Principles) to ensure transparency and avoid potential misrepresentation.
Accruals for Future Fees: When accruing expenses like a management fee for a future period (e.g., 2025), the critical factor is the matching principle, which ensures that expenses are recorded in the period in which the associated revenues are earned. In this case, you would generally accrue the fee in January 2025 when the services related to that fee are provided or when it becomes realizable. Accruing it at that time ensures that it matches the revenue it is meant to support. While the actual timing of the accrual can theoretically occur at any point in the Accounting period as long as it’s reported in the correct financial statements, it’s best practice to record such entries as close to the period they pertain to as possible to maintain accuracy in financial reporting.
Feel free to tweak the response or let me know if you have further questions!