Our current system allows us to make entries at the end of an accounting period for bills like taxes and payroll that we will be receiving bills for in the following period, but that will be for services or items consumed in the current period. We have liability accounts for these accruals which we use as the offset account for these entries. During closing of the following period all accrual entries are automatically reversed.
I don’t see anything built into ERPNext to provide similar functionality. We can do a similar thing manually using journal entries in ERPNext, but I’m wondering if I may have missed anything in ERPNext that allows specific accural entries and would also handle reversing those entries in the future.
I’m not sure I’m fully understanding what you’re describing here. Are the accruals estimates, and thus you’re looking to reverse the end of period balances? Or are you looking to reconcile the offset account against its pair?
The accruals are good estimates. Basically trying to get our financial year or quarter to reflect actual costs incurred during the period for things like payroll which will continue accruing during the last days of a period, but which won’t actually be booked or paid until the following period.
There’s a good chance that I’m misunderstanding your process, but what I think you’re describing should happen automatically as part of the accruals process. Consider a trivial example showing payroll taxes for Q1 (Jan-Mar):
Account
Date
Debit
Credit
#1: January Payroll
Salaries expense account
31 Jan
10,000
Payroll payable
31 Jan
9000
Tax liability account
31 Jan
1000
#2: February Payroll
Salaries expense account
28 Feb
10,000
Payroll payable
28 Feb
9000
Tax liability account
28 Feb
1000
#3: March Payroll
Salaries expense account
31 Mar
10,000
Payroll payable
31 Mar
9000
Tax liability account
31 Mar
1000
#4: Q1 Payment on Bill from Tax Office
Cash account
20 Apr
3000
Tax liability account
20 Apr
3000
Vouchers #1-#3 would be generated by ERPNext during payroll processing, and then #4 would be generated at the time of payment. Expenses will show up on your Q1 income statement, regardless of when payment is made to the tax office.
Is this your process? If so, what are you looking to have generated automatically?
@peterg
Thank you for getting back to me. I don’t think that’s quite what I’m getting after. I think @centaur is close to what I am looking for. I need to use the feature they pointed out and see. I’m quoting below from a nice explanation I found on the web of the process of accrual accounting I’m referring to. It does a better job of explaining it than I was able to:
In accounting, the matching principle states that expenses are to be matched with revenues. In practice this means that all expenses associated with generation of revenues within a month (quarter, year) should be included in the income statement in the same period as the revenues.
Accounting events are based on source documents. For example, receipt of inventory is supported by a packing slip or bill of lading. Accounting would use this document to record the inventory received.
Sometimes source documents are not available when a month is being closed. Examples of such source documents are utility bills not received by the time the month is closed. The reason may be that such utilities have billing cycles different from a calendar month. They may calculate cost of services provided from the 21st of the current month to the 20th of the following month.
Your company, however, still incurred utility expenses in the current month, even though you don’t have a source document to support that. What can you do to match revenues with related expenses in such a case?
You can accrue for such expenses. An accrual (a liability accrual) means recording expenses incurred but unpaid by month (quarter, year) end.
In cases when no source document is available to support the amount of accrual, the accrual can be estimated based on history and other known information.
I will have to speak with my bookkeeping team tomorrow, I’m not sure if the provisional accounting feature will work for us as we record some expenses as journal entries such as payroll, and I don’t think they would want to start creating purchase receipts and invoices for our payroll. The feature is so close to what I’m looking for, but after much thought and help with the answers that have been provided on this post, I think we will be able to achieve what we need through manual journal entries and reverse journal entries, we will just need to build the process into our internal check lists for end of periods.
Again thank you to both of you.
I’m bit confused why you would use Journal entry for Payroll ?
Isn’t the salaries already defined ? I presume you use the Payroll module so when you do a payroll entry at the end of the month. its an accrual entry to the Payroll Payable head (expense).
Yep, I understand what accrued expenses are. The example I posted is all accrual-basis. Notice on vouchers #1-#3 there’s no actual cash transaction, just a recording of expenses to liability accounts. Payment of that liability doesn’t come until after the accounting period ends, but the income statement will report everything in the accrual period (when the expense was actually incurred, not when it was paid).
If you’re trying to do something more complicated than that, I’m still not really sure what it is. For example, this…
…is not a practice I’ve seen before. I know reversing entries are sometimes used to simplify accruals that span accounting periods (a payroll period that cuts across two fiscal years, for example), but it’s not clear to me yet why you would ever want to reverse all accrual entries for a given period.
I’m sure there’s an explanation (related to the fact that you’re using offset accounts, perhaps?), but we need a fair bit more information to understand what’s going on.
I am not an accountant, just a programmer trying to customize ERPNext to suit my companies purposes, so my understanding of these concepts is still forming. But continuing the example that I posted last time:
If I want to book estimated utility costs for the last days of a month which lie between the utility companies billing cycles,
I would estimate the utility expenses for those days: below is an example:
accrual as of March 31 to be $11,355. The following journal entry will be posted:
To accrue utility expenses at March 31:
Date
Account Titles
Debit
Credit
March 31
Utility Expenses
11,355
Accrued Utilities
11,355
Usually during the following month, such accrual is reversed. The reversal takes place because the actual bills will be received and paid and posted as a reduction to cash and an increase in utility expenses. This paid amount will also include the 11 days from March. Thus, if the March 31 accrual is not reversed, the 11-day expenses would be posted twice (expenses will be overstated incorrectly):
There are many similar expenses which we currently enter at end of period, such as rent, payroll, maintenance services etc.
For all of these expenses we will enter an estimated or known cost into an accrual account, and then in the next period we will enter them again as normal transactions when we receive the full bill. This allows us to present a more accurate picture for our expenses in the previous period, but if we don’t then reverse the accruals they will be double entered.
The provisional accounting tool added in version 13 of ERP looks like it does something very similar to this, but only for non-stock items that would be received via a purchase receipt and then later invoiced. But my company does accrual entries for payroll too which as I said we enter via journal entry. We use a third party payroll service, not the payroll module in ERPNext. The payroll company provide us with a summary of how much we paid to each department. and we reflect that as a simple JE. an example of that JE would use accounts called maintenance-labor and checking-account. I understand this is a non-standard way of doing things. And in that case the only way I can think of to accrue those payroll expenses for a portion of the month is through a JE to our accrued-labor account and the bank. Once we receive the statement from our payroll company we would book it in full as usual, but then reverse the original accrual JE to avoid double booking the portion of the payroll we accrued the previous month.
If I’m understanding you correctly, you’re not trying to reverse all accruals, just the adjusting entries added at the end of the previous period. This is what I was thinking of in my last post when I mentioned using reversing entries to simplify things that span accounting periods.
This is an optional step in the accounting cycle, useful to help accountants remember that an income or expense has already been booked. Often the need for this is eliminated by automated payment reconciliation tools and realtime payable/receivable ledgers (both of which ERPNext has).
If your accounting team prefers to still do it this way, they absolutely can. The question is automation. Off the top of my head, I’m not sure how to identify mid-cycle accruals in an automated way.
I’m not sure that’s true, as the provisional accounting feature has no awareness of accounting periods. The reversal is applied directly to the purchase receipt on the very same day.
Thank you for your continued help. We’ve been stuck on an old ERP for 20 years and our business practices have been shaped by the limitations of that system. Trying to bridge the gap and move people to new ways of doing things is always hard.
We’ll just have to deal with the lack of automation as we modernize how we do things.
Just to add, there probably is a way to automate this — or at the very least to streamline it significantly — but it’s going to take a bit of thinking about how different voucher types are created. Feel free to tag me if you’ve got something in particular that you’d like to automate. ERPNext’s scripting capabilities are quite robust.
