Where do accruals appear on the balance sheet?
/What is an Accrual?
An accrual allows a business to record expenses and revenues for which it expects to expend cash or receive cash, respectively, in a future period. It is an essential element of the accrual basis of accounting. It is nearly impossible to generate financial statements without using accruals, unless the cash basis of accounting is used.
Where Do Accruals Appear on the Balance Sheet?
The vast majority of accruals are for expenses. You record an accrued expense when you have incurred the expense but have not yet recorded a supplier invoice (probably because the invoice has not yet been received).
Accrued expenses tend to be short-term, so they are recorded within the current liabilities section of the balance sheet. Here are examples of accrued expenses and the accounts in which you would record them:
Interest accrual is recorded with a credit to the interest payable account
Payroll tax accrual is recorded with a credit to the payroll taxes payable account
Wage accrual is recorded with a credit to the wages payable account
If you have several small accruals, it may be acceptable to record them all within an "other liabilities" account. You should not record any accruals in the accounts payable account, since that is reserved for trade payables that are usually posted to the account through the accounts payable module in the accounting software.
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Accrued Revenue
A less common accrual is for revenue. Accrued revenue is recorded when you have earned revenues from a customer, but have not yet billed the customer (once the customer is billed, the sale is recorded through the billing module in the accounting software). Accrued revenue situations may last for several accounting periods, until the appropriate time to invoice the customer. Nonetheless, accrued revenue is characterized as short-term, and so would be recorded within the current assets section of the balance sheet. The entry for accrued revenue is typically a credit to the sales account and a debit to an accrued revenue account. Do not record any revenue accruals in the accounts receivable account, since that is reserved for trade receivables that are usually posted to the account through the billings module in the accounting software.
Reversing Journal Entries
You should always create accrual journal entries so that they automatically reverse themselves in the next accounting period. Otherwise, there is a strong likelihood that they will remain on the balance sheet long after they should have been removed. Most accounting software packages have a reversing flag that you can check when setting up a journal entry; doing so will automatically initiate a reversing entry in the next reporting period.
Accrual Supporting Documentation
Auditors will review any accruals on the balance sheet above a certain minimum size, so be sure to maintain detailed supporting documentation containing the reasons why you have recorded them. This documentation should include a supervisory sign-off by a senior-level accountant for accruals with a larger dollar value, to show the auditors that there is an approval control over this process.