Accrual-basis accounting is a concept in which expenses are recorded when incurred, not when amount is paid. 1. ACCRUALS / PROVISIONS: All expenses incurred to generate revenues must be recognized in the same period as the related revenues. A provision is an amount that you put in aside in your accounts to cover a future liability.  2. PREPAID: A type of asset that arises on a balance sheet as a result of business making payments for goods and services to be received in the near future.

1. ACCRUAL / PROVISIONS
AND
PREPAID ACCOUNTING
By Deepak Soni

2. AGENDA
1. Concept of Accruals / Provisions / Prepaid
2. Accounting-Adjusting Entries
3. Role of Finance Team & GL Codes Category (Attached as Excel)
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3. Concept of Accruals / Provisions /
Prepaid
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4. UNDERSTANDING OF TERMS
Accrual-basis accounting is a concept in which expenses are recorded when
incurred, not when amount is paid.
1. ACCRUALS / PROVISIONS:
– All expenses incurred to generate revenues must be recognized in the same
period as the related revenues.
– A provision is an amount that you put in aside in your accounts to cover a
future liability.
2. PREPAID: A type of asset that arises on a balance sheet as a result of business
making payments for goods and services to be received in the near future
• NATURE OF ACCRUALS/PROVISIONS:
– Services rendered but Invoice not received - Non-visibility of Invoice Value
– Services rendered but Invoice not received - Visibility of Invoice Value
– Invoice received but put on hold due to mismatch
– Activities planned & expected to be incurred by last week of month end
– Expense Incurred by Distributor as per Contract Term
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5. Note:
1. Meaning of Invoice = A list of goods sent or services provided, with a statement of the sum due for these; a bill. In other words, An invoice, bill or
tab is a commercial document issued by a seller to a buyer, relating to a sale transaction and indicating the products, quantities, and agreed prices
for products or services the seller has provided the buyer.
2. All Invoices received by Marketing Team must be submitted to the Finance Team
ACCRUALS/PROVISIONS - FLOW CHART
Covered in
Prepaid
Expenses
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6. ADJUSTING ENTRIES
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7. MOST COMMON ADJUSTING ENTRIES
1. Prepaid Expenses:- Expenses that have been recorded (paid) but
not yet incurred.
2. Accrued Expenses:-Expenses that have been incurred but not
yet recorded.
Code Description
L3004003011 Outstanding Expenses 11-12
L3004003012 Outstanding Expenses 12-13
L3004003013 Outstanding Expenses 13-14
L3004003014 Outstanding Expenses 14-15
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8. Our Company is rendered the services for Marketing or assessed
expenses as Incentive/ORC/Commission/rebate of Rs. 100,000 for the
month of Juyl 2014, but will not make this payment until July 25, 2014. An
adjustment will be needed. What is the adjusting entry?
EXAMPLE: ACCRUED EXPENSE
Original Entry none none
Correct Balances 100,000 100,000
Expense A/c
Debit
Outstanding
Expenses
Adjusting Entry: 25th July Expenses A/c Dr. 100,000
To Outstanding Expenses 100,000
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9. MONTH END ACCRUALS – Entry 1
Accrual Expense – L3004003014
Expenditures must be charged to the month in which majority of the services are
performed.
Example JV’s as follows:
To record expenditure as a Accrual / Provision Expense in FY 14 – July Month:
Debit Expenses A/c
Credit Outstanding Expenses
To record the reversal of Accrual / Provision Expense in FY14 – August Month:
Debit Outstanding Expenses
Credit Expenses A/c
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10. On Jan 1, 2014 our company pays 120,000 for one year’s AMC/Insurance
in advance, covering Jan 1, 2014 to Dec 31, 2014. On July 25, 2014, an
adjustment will be needed. What is the adjusting entry?
EXAMPLE: PREPAID EXPENSES
Original Entry 120,000 120,000
Correct Balances 50,000 50,000
Prepaid Rent Bank AMC Exp
Adjusting Entry 50,000 50,000
Adjusting Entry: 25 July Prepaid Expense 50,000
AMC Expenses 50,000
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11. MONTH END ACCRUALS – Entry 2
Prepaid Expense – A3005002006
Expenditures must be charged to the month in which majority of the services are
performed.
Example JV’s as follows:
To record expenditure as a prepaid expense in FY 14 – July Month:
Debit Prepaid Expenses A/c
Credit AMC/Insurance Expenses A/c
To record the reversal in FY14 – August Month:
Debit AMC/Insurance Expenses A/c
Credit Prepaid Expenses A/c
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12. ROLE OF FINANCE TEAM
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13. FINANCE ROLE
1. Analyze transactions and business documents.
2. Journalize transactions.
3. Posting of adjusting entries:
– Adequacy of the provision to ensure that there is no excess provision or
under-provision – Monthly Basis
– The provision is justified as on the date of the financial statements;
– Next Month – Reverse the Accruals/Provisions/Prepaid.
At Every Month End - 2 days before that:
• Concerned member will send the Provision mail request to all Finance & Other teams.
• All team member needs to revert the Concerned/responsible member & accordingly he
will do the provision in the books
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