As you no doubt may already know, accounting in most countries and companies is accruals based. The other method of choice is to recognize everything based on cash movement, but this usually applies to self-employed people and is very strictly regulated in most countries. Anyhow, as most of us need to use the accruals based accounting, the key thing about which is the accruals – what are they and why would you need one?

The key principle to accruals based accounting is the period in which the events and conditions happened that either resulted in an expense or an income for the company. Consequently, it’s this very same period in which those transactions and their effect needs to be recognized.

Recording accounts payables and receivables is one thing. They are based on invoices or similar source for exact amount and due time for the payment. But when it comes to liabilities or income that we are currently exactly not aware of simply because we haven’t received or sent out an invoice it gets mote trickier. To be honest, it’s not that difficult and more just about remembering things.

Although you have not received an invoice for some expense, it’s not an excuse to not recognize it on the income statement and as a result on the balance sheet. The same applies to revenue – if you know that an invoices shall be made in near future, you have accrued revenue on the income statement and balance sheet.

In order to have an overview, and this applies mostly to bigger companies, we suggest having a certain procedure in place to gather all the information about invoices not yet received, but services or goods purchased by other employees. In bigger companies it’s really necessary since so many people can make acquisitions, but being unaware of proper accounting methods and principles, you really cannot blame them. So again, take good care in training your colleagues.