The Manual Accruals component enables you to calculate and post accruals in General Ledger Accounting automatically.
You enter the data once for a business transaction that you have to accrue. On the basis of this data, the system calculates the amounts to be accrued. You can also simulate these amounts. In each period, you can start an accrual run, which posts all accruals for the various business transactions.
The functions in Manual Accruals support the use of parallel valuation methods. This means that you can calculate and post accruals according to different accounting principles simultaneously.
The Manual Accruals component is based on the Accrual Engine tool. The transactions to be accrued are managed in Manual Accruals. The processes for calculating and posting accruals, on the other hand, are managed in the Accrual Engine. For more details, see Manual Accruals and the Accrual Engine.
Before you can use the functions in Manual Accruals, you have to make extensive Customizing settings. For example, you have to define the accounting principles according to which you want to accrue your business transactions and define the calculation rules according to which you want to calculate the amounts to be accrued. For automatic posting of accruals, you have to define the account determination.
A number of Customizing settings also allow you to tailor the functions to your individual requirements. For example, you can add custom fields (parameters) to the functions.
These settings are in Customizing for Financial Accounting under General Ledger Accounting ® Business Transactions ® Manual Accruals.
In Financial Accounting you can also post accruals with the recurring entries function. In contrast to recurring entries, the functions in Manual Accruals offer you the following benefits:
· You only have to enter accrual transactions once, after which they are calculated and posted automatically
· Greater flexibility, meaning that the calculated accrual amounts can vary
· Depiction of complex calculation rules
You can use the following functions for calculating and posting accruals:
· Processing Accrual Objects
To enter the data for a business transaction that you want to accrue, you first have to create an accrual object. An accrual object contains all data that the system requires to calculate and post accruals for this business transaction.
The functions for creating and changing an accrual object are the central functions of this component. This is where accrual processes are managed and controlled.
· Periodic Accrual Run
In a periodic accrual run, the accrual postings are made for the posting period. You can reverse a complete accrual run after it has been carried out.
· Displaying Totals Values and Line Items
Totals values and line items are stored for the accrual postings. You can display these.
For detailed information on the functions in the Manual Accruals component, see Accounting ® Financial Accounting ® General Ledger ® Periodic Processing ® Manual Accruals from the SAP Easy Access screen.
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The difference between cash and accrual basis accounting has to do with the time frame in which revenues and expenses are recorded and reported. Cash basis accounting will suffice if your business is a simple one. However, the accrual basis will give a more accurate picture of the results of business operations.
<b>Comparing cash and accrual basis accounting</b>
Cash basis accounting is a very simple form of accounting. When a payment is received for the sale of goods or services, a deposit is made, and the revenue is recorded as of the date of the receipt of funds no matter when the sale was made. Checks are written when funds are available to pay bills, and the expense is recorded as of the check date regardless of when the expense was incurred.
The primary focus is on the amount of cash in the bank, and the secondary focus is on making sure all bills are paid. Little effort is made to match revenues to the time period in which are earned, or to match expenses to the time period in which they are incurred.
Accrual basis accounting matches revenues to the time period in which they are earned and matches expenses to the time period in which they are incurred. While it is more complex than the cash basis, it provides much more information about your business. The accrual basis allows you to track receivables, amounts due from customers on credit sales and payables, amounts due to vendors on credit purchases. The accrual basis allows you to match revenues to the expenses incurred in earning them, giving you more meaningful financial reports.
<b>Cash basis.Vs.. Accrual basis...</b>
Revenues are recorded when they are received, which may be before or after they are earned.
Revenues are recorded when they are earned, which may be before or after they are received.
Expenses are recorded when they are paid, which may be before or after they are incurred.
Expenses are recorded when they are incurred, which may be before or after they are paid.
Financial statements reflect revenues and expenses based on when transactions were entered rather than when revenues were earned or expenses incurred.
Financial statements match revenues to the expenses incurred in earning them, and more accurately reflect the results of operations.
No receivables are recorded.
A receivable is recorded when payment is not received at the point of sale.
No payables are recorded.
Payables are recorded when payment is not made at the time of purchase.
No method of tracking partial payments is available.
Revenues and expenses are recorded in full, even though partial payments may be made over extended time periods.
Should I use cash or accrual basis?
The primary advantage of the cash basis is that it is quick and easy. For a business that does not sell on credit, and pays bills as they are incurred, it may be all that is necessary. The cash basis records only cash transactions, making the cash account a crude measure of how well the business is performing.
However, when a business makes sales or purchases on credit, the cash basis does not accurately reflect the results of operations. The cash basis does not provide a system for managing unpaid bills or for tracking customer receivables.
When a business makes sales on account i.e. on credit the accrual basis of accounting will not only record the revenue in the proper time period, it will also keep track of accounts receivable: amounts due from customers on completed sales. The accrual basis matches revenue to the time period in which it was earned, making your financial reports more meaningful.
Expenses recorded on the accrual basis may be coded to the proper time period by entering bills in the accounts payable account. Using accounts payable also provides reports showing amounts owed to vendors, making it easier to organize and prioritize bills and manage your cash flow. The accrual basis gives a more accurate picture of profit or loss because it includes all revenues and expenses, paid or unpaid.
Note Another advantage of using the accrual basis in Microsoft Small Business Accounting is that an accounting system set up on the accrual basis can also generate cash basis reports. This is the best of both worlds, matching revenues to expenses and giving information on accounts receivable and accounts payable while still being able to generate reports that approximate what happened on a cash basis.
How do I record revenues on either the cash basis or accrual basis?
Most business owners understand accounts receivable intuitively. A business creates invoices at the point of sale and between the time the sale is made and the payment is received the company has accounts receivable. Therefore, to record revenues on the accrual basis, use the invoice form to record sales.
When cash is received at the point of sale, the cash receipts form is used and there are no accounts receivable on that sale. To record revenues on the cash basis, use the cash receipt form to record sales.
If you have been using cash basis and want to switch to accrual basis, pick a date todays date works just fine and begin recording transactions using invoices and bills. All reports before that date will be cash basis, and all reports after that date will be accrual basis.
How do I record expenses on the accrual basis?
The accounts payable process is merely the flip side of the accounts receivable coin. To use the accrual basis to record expenses, use accounts payable by first entering bills, then recording checks using the pay bills menu option. The Accounts Payable flowchart demonstrates the flow of transactions in an accounts payable system.
The accounts payable process begins with an order placed with a vendor. The order may be verbal, or it may be represented by a purchase order . Many small businesses do not use purchase orders even though they are an excellent way to track orders and the details related to those orders.
Note In Microsoft Small Business Accounting, purchase orders may be converted into bills, allowing the user to compare and verify the purchase order details to the bill at the time of entry.
For those businesses not using purchase orders, the accounts payable process begins when a bill is received.
Enter bills into accounts payable immediately upon receipt. File unpaid bills in an accounts payable file.
Bills are filed alphabetically by vendor, with the newest bill on top.
When bills are ready to be paid, the Pay Bills screen shows all unpaid bills, which may be filtered by due date and sorted by vendor name or due date. Credits may be applied to individual bills and full or partial payments made.
Note Microsoft Small Business Accounting allows bills to be paid via check, electronic funds transfer or credit card, all from the Pay Bills window.
Once the check is generated in your accounting software, it may be printed from the File menu. If you are using voucher checks, the software will print the reference number of each bill being paid on the voucher for easy identification by your vendor.
Note For information about ordering integrated checks designed for Small Business Accounting, see Microsoft Checks and Forms.
Tear off the check stub and staple it to the bill. The check stub records the check date, amount of each payment and reference number (the vendors invoice number).
File the bill with the check stub in the paid bills file. Paid bills should be filed in an organized manner, sorted alphabetically by vendor with the newest bills on top, or in the front of the file. When looking for a paid bill, it is most commonly a recently paid bill. Filing the newest bills chronologically, in the front of the file, will make finding the one you want quick and easy.
<b>Benefits and costs of accrual basis accounting</b>
The extra effort required in using the accrual basis is offset by the organizational and reporting capabilities of your accounting system. The extra effort required to enter invoices and receive payments is offset by the ability to track details about amounts due from customers. The extra effort required to enter bills and pay bills is offset by the ability to track details about amounts due to vendors.
For example, once entered into accounts payable, the vendor bill can be tracked using accounts payable reports.
In the vendor record, the Financial History tab shows all bills, credits and payments for that vendor.
The A/P Aging Summary and A/P Aging Detail reports show outstanding (unpaid) bills. Details of all accounts payable may be analyzed in the accounts payable aging report. The accounts payable aging report is a standard accounting report that shows the balance of all unpaid bills at any point in time. This is a good report to use to prioritize payments and manage cash flow.
The Profit and Loss report will show all billswhether the bill has been paid or noton the accrual basis, and only paid bills on the cash basis.
The balance sheet will show the vendor liabilities (unpaid bills) in the accounts payable account.
By entering bills immediately upon receipt, any bill can be found by looking in the accounts payable reports. Using this system, if a bill cannot be found in the reports or in the bookkeepers inbox, you can be confident that it has not been received. Likewise, all unpaid invoices may be tracked in accounts receivable reports, and a complete history of customer payments may be found in the customer records.
While the cash basis of accounting will suffice if your business is a simple one, the accrual basis will, in most cases, give a more accurate picture of the results of business operations. Using the accrual basis, the profit and loss report will include revenues that have been earned but not received and expenses that have been recorded but not paid. The accrual basis allows you to generate reports on customer receivables and vendor payables, and send statements to customers detailing the amounts due. The balance sheet will show amounts due from customers (accounts receivable) as an asset, and amounts due to vendors (accounts payable) as a liability. In addition, using the accrual basis allows you to generate both accrual basis and cash basis reports. Using the cash basis will yield only cash basis reports
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