Accruals in AP

An accrual is an accounting entry that recognises an expense (or revenue) in the period it is incurred, regardless of when cash changes hands or an invoice is received. In accounts payable, accruals are raised when a business has received goods or services before the supplier's invoice arrives -- ensuring that the expense appears in the correct reporting period rather than in the period when the invoice is eventually processed.

Accruals are fundamental to accrual-basis accounting, which is required for businesses above the ATO's cash basis threshold (generally AU$2 million turnover) and used by most businesses for management reporting even if they meet the cash threshold. Without accruals, a business that receives AU$500,000 in services in June but receives the invoices in July will show a significantly lower June expense and a materially higher July expense than the economic reality -- distorting period-on-period comparisons and making June's financial results meaningless for management purposes.

Types of AP accruals

The most common AP accrual is the goods received not invoiced (GRNI) accrual: the business has received delivery of goods or completion of a service milestone, confirmed by a goods receipt note or project sign-off, but the supplier's invoice has not yet arrived in the AP system. The accrual entry recognises the expense now and creates a liability (accrued payable) that will be reversed when the actual invoice is received and processed.

Period-end service accruals are raised when a service runs continuously across a period end and invoices are received in arrears. Electricity consumed in June but billed in July, cleaning services invoiced monthly in arrears, and consulting fees where invoices are issued at project completion rather than monthly are all candidates for period-end accruals if the amounts are material.

Payroll-related accruals (accrued wages, accrued superannuation) are typically handled by the payroll system rather than the AP team, but the principles are the same and finance teams often manage them through the AP module in smaller organisations.

Accrual versus prepayment

Accruals and prepayments are mirror images. An accrual recognises an expense before the invoice arrives (goods received, invoice not yet received). A prepayment recognises an expense paid in advance before the goods or services are received (invoice paid, benefit not yet consumed). Annual insurance premiums, software subscriptions, and rent paid quarterly in advance are common prepayment situations in AP. The prepaid amount is an asset (prepaid expense) that is amortised to the income statement as the benefit is consumed over the payment period.

Managing accruals at month-end

Accruals should be raised as part of the month-end close process, not as an afterthought during financial statement preparation. The AP team should maintain an accruals schedule listing all current accruals, the amount, the basis for the estimate, and the expected invoice date. When the actual invoice arrives and is processed in the following period, the accrual is reversed and the actual invoice amount is recorded. The reversal and the actual invoice should net to the expected accrual; a material variance between the two indicates either an inaccurate accrual estimate or an invoice discrepancy that needs investigation.