Year-End Accruals

What is an accrual?

An accrual, or accrued expense, is a means of recording an expense that was incurred in one accounting period but not paid until a future accounting period. Accruals differ from Accounts Payable transactions in that an invoice is usually not yet received and entered into the system before the year end. Recording an accrual ensures that the transaction is recognized in the accounting period when it was incurred, rather than paid. This is a requirement of GAAP-based accounting, and provides a more accurate and up-to-date view of the University’s financial position than the cash- basis accounting method, in which expenses are recorded when paid. For an expense to be recorded in the current fiscal year, the expense should have been incurred by June 30, meaning that the goods should have been received or services should have been rendered by that date (end of day).

When recording an accrual, the debit of the journal entry is posted to an expense account, and the credit is posted to an accrued expense liability account, which appears on the balance sheet. When the University pays for the expense, an entry to reduce the accrued expense liability and to reduce cash is recorded by posting a debit to the accrued expense liability account and a credit to the cash account.

Examples of when an accrual is necessary

  • Scenario 1: A purchase order is placed on June 1 for lab equipment, and the equipment is received on June 28. An invoice for $3,000 is received on July 1 and is paid on July 30. An accrued expense of $3,000 must be recorded as of June 30 to ensure that the expense is properly accounted for in the current fiscal year. The way to accrue this expense is to record the receiving of the goods in Prime Financials.
  • Scenario 2: An electric bill for 701 Carnegie is received on July 15 in the amount of $6,000. The dates of electric service are from June 10 – July 10. An accrual would be necessary as of June 30 for $4,000, as 2/3 of the time of service occurred in June, and 1/3 occurred in July.

What types of accruals are recorded at Princeton University?

There are generally four types of year end accruals recorded by the University:

  1. Receipt Accruals
  2. Budget Office Accruals
  3. Central Service Provider Accruals
  4. Controller's Office Accruals

Standard (Receipt) Accruals

Purchase Order Receipt Accruals

These accruals are recorded automatically by Prime Financials based on receipts entered against purchase orders by the University departments. If goods are entered as received, but they have not been paid yet, the system will record the expense as an accrued expense. The expense associated with the invoice is booked when Accounts Payable enters the invoice, not when the invoice payment is sent to the supplier. Receipt accruals will only be recorded for expenses greater than $2,500. Goods and services received by June 28 must be entered by 4:30 p.m. on June 28.

Nonstandard Accruals

Budget Office Accruals

These accruals are done by request by the department and in collaboration with their budget office analyst. Budget office accruals are usually necessary when a department needs to accrue or defer an expense/revenue transaction that meets the above accrual criteria and that are not automatically recorded by the system (as in receipt accruals). These accruals are usually non-PO accruals for activities that have taken place prior to June 30. These accruals must be submitted and approved by the budget office by 12:00 p.m. on July 3.

Central Service Provider Accruals

These accruals are recorded by certain offices (such as Facilities, Dining and OIT) at year end during 1st and 2nd close. Examples of Central Office accruals are utility bill accruals that span more than one accounting period. These accruals must be submitted to [email protected] for posting by 12:00 p.m. on July 10. Budget office must be notified of the accruals submitted.

Controller's Office Accruals

There are also other types of large accruals made during this process. Controller's Office accruals are recorded by the Controller’s office during the year-end financial statement process. These accruals are generally calculated by reviewing significant payments made after year end and determining if the related expenses occurred in the current fiscal year or the next fiscal year. For these accruals, departments and projects are not charged; rather these are charged to a special Controller’s office department. These accruals are generally determined after the general ledger is deemed final for Information Warehouse reporting.

Reversal of Accruals

In the next fiscal year, the accruals for the prior fiscal year need to be reversed from the balance sheet so that expenses are not double counted when paid in the next fiscal year. Accruals are automatically reversed on the first day of the new fiscal year. Reversals of accruals are done automatically by the Prime system when the option is selected to automatically reverse the entry in the next accounting period (doing so assigns the same journal class number to the reversing entry as the original entry).