I know accounting books contend which losses involving accruals should be entered as follows:
Accrual Established during End of Account Period:
Debit Expense $500 (based upon estimate)
Credit Accrued Liability $500 (based upon estimate)
When Actual Expense is Paid:
Remove Accrual:
Debit Accrued Liability $500 (remove estimate)
Credit Expense $500 (remove estimate)
Pay Expense:
Debit Expense $450 (based upon tangible bill)
Credit Cash $450 (based upon tangible bill)
Although not discussed in books, does the following essentially or infrequently start in the genuine commercial operation environment as well as is it GAAP compliant?
Accrual Established during End of Account Period:
Debit Expense $500 (based upon estimate)
Credit Accrued Liability $500 (based upon estimate)
Pay Expense:
Debit Accrued Liability $450 (based upon tangible bill)
Credit Cash $450 (based upon tangible bill)
Reverse Unused Accrual:
Debit Accrued Liability $50 (clear volume over accrued)
Credit Expense $50 (clear volume over accrued)
{ 2 comments… read them below or add one }
I think the use of accruals is made when the amount of the liability can be reliably measured. For instance, a telephone bill relating to the previous month may has been received after the month end. In such cases accrual is made of the known liability.
For such cases where the bill has not been received, it is usual to make a provision based on estimates in order to keep the records straight. The estimate may or may not be accurate. In such cases, the provision is reversed and a correct accrual is recorded.
Yes, your alternative method is often used in practice. When you are working, you’ll find that the fewer entries you have to make, the better. In practice, it’s often done like this:
Accrual Established at End of Account Period:
Debit Expense $500 (based on estimate)
Credit Accrued Liability $500 (based on estimate)
Pay Expense & Reverse Unused Accrual in one step:
Debit Accrued Liability $500 (zero out estimate made)
Credit Cash $450 (based on actual bill)
Credit Expense $50 (clear amount over accrued)