Recording of Accruals
One of the challenging tasks related to business owners as well as accountants is how to record expenses and income that will accurately or reasonably reflect the results of operations of the business to answer the most common question business owners ask: “Do my business really gain income or incur operating losses?”
The best answer to know the business operating results is to be able to properly match revenue over the costs incurred. In this case, the accrual method of accounting enables you to recognize both revenues when it is earned rather than recognizing revenue when the payment for the revenue is received. The same also holds true to recognizing expenses when it is incurred, rather than recording expenses when it is paid.
To be able to enter accrued expenses, you have to recognize the Liability account arising from this transaction. If you are using Accrued Expenses payable account, you have to record the expenses and at the same time record the accrued liability account. If you have not setup the liability account for the accrued expenses, you have to setup by going to Accounts List and click on Add account and proceed to create the Accrued Expenses account as per the screenshot below:
MYOB allows you to record accruals of expenses using general journal entries. To enter accrual of expenses in MYOB, go to the Accounts command centre and click on Record Journal Entry as per the screenshot below:
It is important that in recording accrual using the Record Journal Entry option, you have correctly indicated the date the expenses as incurred and not on the date the expense is entered. So, if you are entering an accrual journal on March 5, 2015 for expenses incurred for the month of February but will only payable on the month of December in the case of employees benefits, you need to change the date of journal into February 28, 2015 so that the expense will be taken up in the MYOB financial records as part of Profit and Loss items for February, 2015 and not for March, 2015.
When the accrued expense is paid on the subsequent months, the entry would be to debit the accrued Expense Payable account and of course, credit the Cash in bank account or the bank account used for which the payment is made. If you are going to record the expense account during the payment of the accrued expense, this will result in recording of the expenses twice and the accrued expense payable remain as “unpaid”. The effect of double recording of expense which was previously accrued would be as follows:
- Overstatement of expense that result to understatement of operating income or overstatement of operating loss.
- Overstatement of Payable account which have an effect of overstating Liabilities in the Balance Sheet.