When an expense is incurred in a prior period, but the payment will be made at a later date (for example, electricity or rent), it should be recorded using Accrual Basis Accounting (Matching Principle). This ensures that expenses are recognized in the period they occur, regardless of when payment is made.
Here’s the step-by-step process to record this in the system:
1. At the Time of Expense Incurrence (before payment is made):
Create Other expense documents from the Accounting module.
In the main tab, add Accural type as the transaction type
When recording an accrued expense, the following entry should be made:
- Debit: Expense Account (e.g., Rent, Utilities, Services)
- You can create a separate GL account, such as "Rent Expense," instead of grouping it with other expenses for better classification.
- Credit: Accrued Expenses / Accounts Payable (Liability)
- You can use a "Current Liability" GL, such as "Accounts Payable," or classify it under "Other Current Liabilities" as needed.
2. When the Payment is Made (at a later date)
Create a Bank/Cash payment document from the Money module.
In the main tab, keep the transaction type as Others, and in the payment details tab, fill in the GL account used in the Other expense document i.e. Other current liabilities.
Once the Bank/Cash Payment Document is posted, the following accounting entry will be generated:
Debit: Accrued Expenses / Accounts Payable
...
(This clears the liability created earlier that was recorded when the expense was initially recognized.)
Credit: Cash/Bank
...
(This reflects the actual payment made for the expense)
This ensures the liability is properly settled, and the financial statements accurately reflect the transaction.
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