Best Practice: Accrual Method for Expense and Revenue


A good practice for any business or self-accounting is to follow accrual system for both revenue and
expenses at the time of its occurrence.

It gives an instantaneous health of the business as both, expense as well as revenue recognition is
recorded as they happen ir-respective of the payments made or received.

This practice has wide acceptance across the business as the “Cash system” does not indicated the
liabilities or credit on the books of accounts.

Let us understand with a use-case.
ABC Ltd has released a service purchase order for painting a structure of 1200 sq ft each month covering
100 sqft.. The payment terms in the service purchase order is “Payment at the end of each quarter”

The vendor starts rendering service each month and completes say 100 sqft in the first month, 95 sqft in
the second month and so on.

The best practice is to book the expense monthly or as and when the figures are available in the system
acknowledging the work completed. This creates an accrual in the system for the expense.
As and when a trial balance is drawn, the expenses acknowledged reflect in the books of accounts thereby
portraying a realistic picture.

The payment could happen as per the payment terms.

In a similar fashion, the good sold, receipt acknowledged by the customer, revenue can be booked in the
system, though payments may be received as per the payment terms.
Now, when we relate to various expenses and revenue at various stages in the business get recorded as
they happen, the books of accounts any point of time reflect the correct health of the business.

Any ERP, with best practice configured and followed would give great benefits to the business.
Rise with SAP… The industry leader in ERP has helped many organizations to derive these benefits.

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