Accrual Accounting: Cut-Off, Journals and the Month-End Close

Accrual accounting recognises revenue when it is earned and costs when they are incurred, not when cash moves. The cash basis waits for payment in each direction. In practice, running the accrual basis is a cut-off discipline: at each period end you decide which transactions belong to the period, then journal whatever the ledger is missing.

Where does cut-off actually get decided?

Cut-off is settled by evidence, not by the date printed on an invoice. For a purchase, the receipt of the goods sets the date; the supplier's invoice may follow weeks later. For a sale, dispatch or completion of the service sets it. Shipping terms can move title earlier or later, so read them before you post.

Where the evidence is silent, the entity's accounting policy governs, and that policy belongs in writing. Consistency matters more than the particular choice. A policy that goods received after the tenth are expensed next month is workable; a policy that changes every quarter is not.

A worked example: the December power bill

The electricity invoice for December arrives in the middle of January. December consumed the energy, so December carries the expense. Estimate the amount from the November bill and what you know of usage, then journal it: debit utilities expense, credit accrued liabilities.

In January, reverse the journal on day one or clear the accrual against the actual invoice when it is posted. Reverse it and also clear it, and the expense lands twice. Do neither, and a stale liability sits on the balance sheet growing more wrong each month. Pick one method, write it into the close checklist, and apply it without exception.

Accrued revenue runs the same logic

Work delivered in March and invoiced in April follows the same logic turned around. Debit accrued income, credit revenue, at 31 March, supported by a schedule of unbilled time or milestones. Reverse on 1 April so the eventual invoice does not double count.

Contract terms can change the answer. If the agreement bills on certified milestones, the milestone date, not the date of the work, fixes the revenue. Where the recognition question is genuinely arguable, that is a policy decision for the accountant or auditor, not a bookkeeping judgement; flag it and move on.

Prepayments are the mirror image

Cash paid before the benefit is consumed is a prepayment, not an expense. Annual insurance billed in January sits almost entirely on the balance sheet and releases to the profit and loss in twelfths. The discipline is identical to accruals: establish the cut-off, post the journal, keep the schedule.

Should you reverse the accrual or clear it?

Both methods work; the failure mode is running both at once. Reversing on the first day of the new period is the cleaner habit, because the real invoice then posts at full value and any estimate error self corrects. Clearing against the invoice keeps the link visible but needs a disciplined note on the entry, or the schedule drifts from the account.

Sequence on close day

Run the routine in a fixed order. Assemble the evidence first: goods received notes with no invoice, dispatch logs with no invoice, open timesheets, recurring bills not yet arrived. Post accruals and prepayments as one dated batch, each line referenced. Reverse last month's entries if that is your method. Reconcile each control account to its schedule before anyone prints a trial balance. A fixed order makes an omission visible the next morning; a loose one hides it until the audit.

Working papers that survive review

Every accrual journal carries its own evidence: the basis of the estimate, the source documents, the reversal date. Keep a schedule listing each accrual, the prior period figure, and one sentence explaining any movement past an agreed threshold. Reconcile the accrued liabilities and accrued income accounts to that schedule monthly, exactly as you reconcile the bank. Reviewers read the schedule before they read anything else, and so will you in twelve months.

Where policy and jurisdiction take over

Tax rules sit on top of the books and often pull the other way. Some regimes tax on cash receipts, some on accruals, some allow a choice below a turnover threshold. Indirect taxes such as VAT or GST frequently have their own trigger point that does not match revenue recognition. An accrual ledger can usually be converted to a cash figure for a return, but the mapping must be consistent year to year. Confirm the local position before you promise an output.

Signs the accrual routine is slipping

The routine needs checking even when it runs monthly. Watch for these:

• An accrual unchanged for three months has stopped being an estimate and become a plug.
• An expense that doubles in a month usually means a reversal was posted twice, or not at all.
• An accrued income balance that never turns into invoices is revenue recognised early.
• A negative accrual is almost always a posting error. Find it before the period locks.

None of these is hard to fix in the month it appears; all of them are painful a year later.