Derecognizing accruals

You’re accruing for missing invoices and possibly even revenue for which you haven’t issued an invoice yet into your balance sheet. There is a certain amount as a liability or an asset (in case of revenue accrual) on your balance sheet and everything couldn’t be more accurate. All your expenses and income are recognized in proper periods and as such the accounting is correct.

Now what to do when the invoices actually arrive or you are able to send an invoice to your client?
Something that you should not do is recognizing those invoices as expense or income. Why? You should not do it simply because they already went through your income statement in the prior period. Doing it once more just generates extra expense or income and messes up your accounting. I’ll tell you why.

Let’s say you have accrued for a supplier invoice so that you add expense to your income statement and also take up a liability. The entries are as follows:

Debit Operating expenses 500
Credit Accruals 500

Now that the invoice arrives, your entries should be as follows:

Debit Accruals 500
Credit Accounts payable 500

With this you’re derecognizing the accrual and are also recognizing the liability against the supplier which you can now when the actual payment date comes, just pay up. With this you really cannot recognize expense or income once more because then you’d have doubled the transaction on your income statement and also two times the liability on your balance sheet.

In case the actual invoice is smaller though than the accrual, the overhead is always written into income (don’t forget though that it’s always written off into the group the initial expense was first taken up). The entry would look something like this:

Debit Accruals 500
Credit Accounts payable 300
Credit Operating expenses 200

In case the invoice is actually in a bigger amount the initial accrual was made for, the extra is charged into the same group on the income statement the initial expense was charged into. The entry looks something like this:

Debit Accruals 500
Debit Operating expenses 200
Credit Accounts payable 700

So just always make sure your accruals are made for proper things and in as accurate amounts as possible.