Bookkeeping & Accounting with Gaps

by Lynnea Bylund on January 19, 2012

What happens when you know you have expenses that are not entered in to QuickBooks yet, and, its time to produce financials (end of month, end of period, end of quarter, end of year) and yet there are some costs missing. How do you fill in the gap?

Repair Phoenix Office Server?and bookkeeping in orange countyIt might be that a vendor invoice has been lost or there is a confusion over the precise amount. It could be that the power company reads your meter on the 10th of the month, so there are 20 days of electricity costs that are not on the books. It could be that your financial planner was spending time revising your portfolio, but he has not sent you his bill for the month. It could be that your four week cycle ends in mid month. How do you split part of a bill in one period and part in the next cycle?

This is when you begin making accruals. They do not have to be to the penny. Accruals are estimates based on the best available facts. For the electricity bill, you would look at the most recent bill and use that to estimate what you would pay for another 20 days (to the end of your accounting month, in this example).

CPA Jeanne Ormsby explains –

The offset to the expense entry is to accrued expenses, a liability account. Likewise, you may have a good idea of what the legal bill will be, or you could estimate the hours times the rate and come up with approximately what the bill will be and make the same type of accrual entry. You might have discussed overall estimated costs with the lawyer, and that might help with this accrual. The important thing is that you are recognizing that there is an expense that relates to this period. Similarly, if there is a disputed vendor invoice, accrue what you believe the bill should be. Always attach your calculations and reasoning to the journal entry support.

In the next accounting period, you will reverse these accruals. The actual bills will have come in and be posted. The net result will be that the difference between the accrual and the actual bill will be an expense in the new accounting period. Say the PG&E accrual was $2200 for 20 days and the new monthly bill is $3000–you will have a net $800 on the books for the new period for that billing period. If you accrued $10,000 for the lawyer’s bill and the actual bill was $9,000, you would have a negative expense in the new period of $1,000. Unless you missed the mark by a huge amount, that is usually just fine.

One word of caution–resist the temptation to use accruals to “even out” your accounting results. You may have investors or lenders that you wish to impress. You may want to show them that you are stable and your income is predictable. Accrual entries are based on currently known facts, even though the numbers are estimates. Accruals are not meant to turn your books into “this is how my expenses would be in the perfect world.” If you cannot show what the estimate is based on, it is probably not a proper entry.

Discuss accruals with your bookkeeper/accountant. Make sure that you are working together to make proper accruals. Ask to see the utility accruals and make sure the support makes sense to you. You will know more about expenses such as legal bills that should be accrued and will need to help estimate those amounts. The bookkeeper/accountant may not even be aware that you have legal expenses at all, if it is a new legal case.

Remember: When you review your draft financials, look at expenses that are unusually low–are there gaps that need to be filled in with accruals?

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