Accrual Accounting-who does this monthly?

[MissE]

Hello Everyone,

I could do with some opinions please.

The company I am employed with would like me to change our accounting method from cash accounting to accrual accounting.

I cant see any benefit to this because I track each contract & budget closely & the monthly management reports I produce / mainly budget reports shows them everything that they need to know.

They are concerned with what other businesses are doing & what financial reports external people would like to see ie if they wanted a bank loan or were to sell the business.

Accrual accounting is a lot of extra work because of the way our 7 contracts work.The Year End Accounts are done via the accountants on an accrual basis, all of our contracts tie in with our year end so there are not many adjustments.
Also I do prepayments / accruals relating to things in the overheads ie rent / insurance

In January For one contract we might receive £100k income, of that £15k is our management fee ie Profit & the £85k is going to be spent at some point in the year.
Then we might pay for £30k of expenses in Jan, but £20k could relate to different months ie we pay £5k for accommodation in Jan, but the training course is not until Feb.
Every single sales invoice, purchase invoice relates to different months!

Do any of you do Accrual Accounting?

Thanks in advance for your advise!

 

[sheelagh]

Based on the information and examples you have provided it does sound as if your employer would find it useful to have management accounts using the accruals method.
You say you are already recording some accruals and prepayments - you can simply add other items into your monthly journals.
Ask them if there are any particular items they are keen to see accrued/prepaid (perhaps just income and direct costs plus the more significant overhead items) and then ask them to look at the calculations with you so that they can understand how complex it is - they might offer you some guidance on what they are looking for in the management accounts, or agree to applying certain monthly averages or estimates for some items. There might be some other calculations prepared by the management team in other parts of the organisation which would help you to collate the figures you need.

 

[MissE]

Thanks for replying.
I am still unsure why you think I need to do accrual accounting?
Here is an example of how one of our contracts work.
Operating Budget - £900,000. Management Fee £180,000.
Customer pays £900,000 / 12 equal instalments, & £180,000 / 12 equal instalments. Monthly Invoice £90,000.The 12 instalments ties in with our year end.
At the moment I would put the monthly invoice on to Sage, & put all of the supplier invoices / expenses on to Sage. Then at the end of the month I would print the activity reports & enter all of the expenses against each line of the budget. So if we had a £40,000 accommodation budget & we paid a £10k invoice then the budget line would show £30k left etc
This provides us with the information that we need to run the business.
What benefit is there for me to deffer income every month, when we know the profit is just the management fee?
Then to move the expenses into accrual & prepayment accounts each month, ie we pay for 20x flights in June, but the training course & flight is not until July, Sept or Aug.
Our whole monthly activity would not match & I would be doing tonnes of adjustment journals every month for each contract.
Thanks!

 

[sheelagh]

The usual purpose of accruals accounting is to match the expenditure against the related income - the matching concept - in each period, and it is usual for managers / business owners to require this information on a monthly basis.

You say you are doing some calculations already for the budget reports, but your employer is asking you to change the way you record and present the information. Clearly your employer wants something different to what you are currently doing, otherwise he would not have asked you to change.
If I was in your position I would start by identifying what your employer wants in the monthly reports package which is not already provided. Hopefully together you can devise/agree a way to present the information which is useful to your employer and does not take up too much of your time.

 

[MissE]

Thank you for the reply again.
Our financial year end ties in with the end of season of all of our contacts. Then the next month a new budget starts.
When the accountants get the Sage back up, all I have to do is deffer income on ONE invoice. All of the expenses tie up with the year end date & end of budgets!
Your right the question to my employers is do they want to see an accurate P&L each month, where is at the moment each month does not relate to the income & exps in that ONE month.
However the budget reports do show them everything that they need to know to track each contract.
We have no variable factors that will effect the profit, so if I did adjustments journals each month the profit on the P&L will be the same each month.
I have said to them that the most important factor in the monthly reports is that they have all the information that they need, in which they haven't argued that they dont they have just been advised from an outsider that we should be doing accrual accounting.
Larger companies seem to have a management accountant as well as data enter clerks, payroll staff etc. I run the entire finance operation for the company & I think I am going to have to free up my work load if they want me to change my accounting system that I have been doing for years.
I was hoping to hear from other bookkeepers that do the accrual accounting method. To see if there were other complicated business out there running several contracts where the accruals concept is not an easy task?!

 

[David Griffiths]

The company I am employed with would like me to change our accounting method from cash accounting to accrual accounting.

Isn't it a case of the person paying the piper calling the tune? If the company has decided that it wants records kept on an accrual basis, I can't see why there is any debate over it.

 

[MissE]

I think it makes sense to ask the right questions before you dramatically change things, especially when they cant see the benefit to changing to accrual accounting other than being told most other businesses do it.
I have recommended that they speak to our accountants to get their view on this too!
I want to make sure it is the right thing to do, before I look at it more closely to see the extra time that it is going to take me each month; to understand if my work load is manageable.
Like I have said I was hoping to find other people in my position who have to process a complicated set of management accounts each month, because that is what it comes down to. At the moment the monthly reports I run are not time consuming & I have many other tasks each month that take up my time!

 

[Strontium Dog]

I think it makes sense to ask the right questions before you dramatically change things, especially when they cant see the benefit to changing to accrual accounting other than being told most other businesses do it.
I have recommended that they speak to our accountants to get their view on this too!
I want to make sure it is the right thing to do, before I look at it more closely to see the extra time that it is going to take me each month; to understand if my work load is manageable.
Like I have said I was hoping to find other people in my position who have to process a complicated set of management accounts each month, because that is what it comes down to. At the moment the monthly reports I run are not time consuming & I have many other tasks each month that take up my time!

It shouldn't be too difficult.

It sounds like you know how much profit each project makes per month. You can just stick all the income and expenses into prepayments/accruals and whip out the appropriate amount each month to give your profit. Not too much work and the directors get exactly what they asked for!

I used to use exactly that technique to do monthly figures for an IT support company.

I would encourage any but the most trivial of businesses to use accrual accounting otherwise monthly figures have no management value.

 

[MrAnchovy]

It sounds like these contracts should be monitored using project costing, sometimes called job or contract costing. If I have understood your business model correctly, matching income and expenses to months would be worse than meaningless.

The business probably needs input at board level, at least on a part-time or even just one-off basis, from someone with relevant experience to set up an appropriate performance management regime.

 

[sheelagh]

I agree with MrA - a tiered accounting system would allow for reporting by project and overall financial accounts based the accruals method. Much of this could be achieved within Sage. It might take a while to set up if you are not already using budgets and projects in Sage, but in the long run it shouldn't take much more of your time.

 

[MissE]

Thank you MrAnchovy & Sheelagh for giving me something different to look into!

Strontium Dog - it's not as simple as that, the activity in each contract can be over 10 different expense areas and they constantly relate to different months, another example other than 20 x flights paid for but relating to different months, would be £5000 spent on uniform but the uniform relates to & gets handed out in different months. Every expense item would have to be monitored, & all in all there is no different profit amount each month. Our customer is paying us our operating budget in full.

 

[Ola1]

So it looks like your companies clients are paying for your services in advance, per your OP.

using the 100k example,

One would expect the income of 15k be recognised in the accounts over the period in which you deliver the services, bearing in mind delivery penalties, claw backs etc. serviced delivered Feb to July. 15k/6 = 2.5k recognised per month

as for the 85k in expenses, with accruals accounting one would expect to apportion the invoices over the period to which they relate. however, one might exclude stuff like hardware purchases such as books,pencils etc, and simply charge as they arrive.

One would think it might be a good idea to discuss revenue recognition formulae with directors and accountants and get it neatly signed off before implementing.

Naturally, none off the above might be relevant depending on your contracts and your accountants assessment of them, but is just a taster off what one might do

And no, it might not be easy, but tis par for the course

 

[MissE]

Thank you to everyone who has shared their views!

After speaking it through with the Accountants they have agreed that I am doing everything correctly; which is good news to my ears!
They have said that our business model relates more closely to how a construction site works, where the expenses are identified to a specific contract.
The Profit & Loss report is produced at the end of the contract only.

We don't produce a monthly P&L because we know that the profit is just the management fee.
Our budget / Contracts runs to the same year end as our financial year, so come year end the full sales income has been raised, & the full budget & expenses have been spent.
Project Job Costing method is being discussed

Thanks.