Accounting Accruals – What are they and why do we do them?
In order to be compliant with GAAP (Generally Accepted Accounting Principles), the University must
include in its financial statements all expenses that are incurred during the year, as well as all income
earned during the year. This requires that we process “accruals” for payables and receivables that are
outstanding at June 30.
What is an accrual? When you pay a bill, the expense is recorded in the General Ledger; when you receive
a payment for a service or good, the income is recorded in the General Ledger. At the end of each year, we
need to make sure that expenses are recorded for all goods or services you have received during the year.
We also need to make sure income is recorded for all goods or services you have provided during the year.
There may be cases where you have not paid an invoice by June 30 for a good or service you received
during the year. You may also have payments you have not yet received for a good or service you provided
this year. In these cases, we need to process a journal voucher to record an “accrual” for the unpaid invoice
and the outstanding income.
In short, accruals allow expenses to be reported when incurred, not paid, and income to be reported when it
is earned, not received. As examples:
A department orders and receives tow computers at the end of June 2004.
However, the bill is not received Until July and is not processed until August. Because
the computers were received in FY2004, an accrual journal for these expenses should be
processed. This accrual would charge the appropriate 33-digit expense coding and would
credit the balance sheet Accounts Payable liability.
A department provides services to an outside institution in June 2004, but doesn’t receive
payment from the customer until July. Because the service was provided in FY2004, an
accrual journal for this income should be processed. This accrual would credit the
appropriate 33-digit income coding and would debit the ba