[Anonymous]

This is more related to practical accruals but theory still applies.

I’m researching a reversing estimated expense accrual account (let’s call it marketing) in which I’m trying to determine if the upcoming December accrual needs revision to see if the accrual was overbooked throughout the year and thus, credit some of the excess accrual back to the I/S. The accrual JE originated in early 2015 based on the previous month’s invoice. Subsequently, it was booked based on a 6-month average of marketing expenses hitting the account. Enter 2016, and the accrual is based on an 11-month average of expenses hitting the account.

After digging into items hitting the marketing account, I realized marketing expenses that shouldn’t have been allocated to the account were hitting it and things that should have been allocated to it were hitting a similar but different marketing account. In other words, the allocation of these expenses has been inconsistent. Plus, the other account did not have an accrual for it. So, I took a wholistic approach and viewed the two marketing accounts as one because they’re very closely related and their expenses have been intertwined for the past two years.

Back to the accrual, I noticed the accrual in subsequent months started ballooning: December 2015 $200K, January 2016 $270k, February $315k, March $375k, April $380k, May $450k, June $500k, July $550k, August $575k, September $590k, October $650, and November 2016 was $750k. Is my understanding wrong of how the accrual account works here? Shouldn’t it be relatively flat month-to-month (i.e. January is $75k, February $75k and so on? In reality, only ~$75k-90k of actual expenses are hitting both marketing accounts combined. Therefore, through November, ~$900k has actually been expensed. I looked at actual spend year-over-year for 2015 to 2016, and it appears the company has saved approximately $200k.

Thanks for your assistance. Sorry for long-windedness.

[Missy]

You mention reversing. Is the previous month's accrual reversing in the current month? If so I'd expect each months to climb. If January's 200k reverses in February and you accrue 270k in February, the February expense is 70k, (270 accrued minus 200 reversal of January)

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[Anonymous]

Yes, the previous month's accrual reverses in the current month. So, I guess maybe there's nothing too wrong here.

Let me ask this though: if a couple months of 2015 were paid in 2016 and a couple months of 2014 were paid in 2015, wouldn't these offset? I expect the trend to continue into 2017 when a couple months of 2016 will be paid.

[Missy]

What's on your balance sheet at year end in accrued expenses should be only 2016 marketing expenses that have happened but you haven't got a bill for. Has nothing to do with previous or future years. If you had an ad in a magazine in December but were waiting for the bill that sits in the accrued expense until the bill comes in January. The year before the accrued expense may be zero, the next year could be much higher. When the bill comes the following year it reduces the accrual.

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[slackergurl]

Your accrual account should only balloon if you are not expensing the invoices. In a perfect world, would accrue for January's expenses at the end of January and pay January'a invoices in February. Your February accrual would only be for your February expenses.

Your accrual account should only include expenses incurred, but not yet posted to the ledger (either by a payment or a PO receipt). If you do not have $750K of invoices yet to be processed, you are over-accrued.

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[GoCPAGo1985]

Sorry, OP, I'm going to nitpick for a second but maybe I can help you get to the answer you're looking for…

You say “expense accrual account”, and while you would certainly have an expense account to match the accrual, one is a nominal acct (I/S), the other is a permanent account (B/S). I imagine you receive a bill from “Big Time Marketing Services” and your monthly accrual looks a bit like this:

1/31 Dr. Marketing Expense $100
Cr. Marketing A/P $100

You now have impacted two financial statement accounts: Your marketing expense I/S acct has a balance through Jan of $100 and your payable has a balance of $100. Now you're saying that you set it up as a reversing entry so on 2/1 you mirror the entry:

2/1 Dr. Marketing A/P $100
Cr. Marketing Expense $100

Now, at some point, your vendor is going to want to get paid and they're going to send you the invoice for January some time in February and your A/P group will pay them (most companies have SoD so that the person recording the payable isn't also the person w/custody of paying cash), so that will look a bit like:

2/15 Dr. Marketing Expense $120
Cr. Marketing A/P $120
Dr. Marketing A/P $120
Cr. Cash $120

Then of course, at the end of the month, since you've been receiving marketing services throughout February, you're going to have to accrue at the end of the month again (let's say using January's invoice amount of $120)

2/28 Dr. Marketing Expense $120
Cr. Marketing A/P $120

My balances through (and as of for B/S accts) 2/28 are:
Marketing Expense: $100 (Jan) – $100 (Rev Jan Accrual) + $120 (Jan Actual) + $120 (Feb Accrual) = $240
Marketing Payable: $100 – $100 + $120 – $120 + $120 = $120
Cash (for comparability): -$120

To bring it back to your original post — I don't know if I fully understood what you were getting at but I guess it depends on what you're seeing grow — your P&L acct or your BS acct. I would say that your accrual wouldn't necessarily always be “flat” as you could be doing more and more business every month. But if your BS account isn't reducing (i.e., as you pay) then there may be an error – my payable is just my obligation to pay someone for services provided to me during an accounting period. Your P&L account, however, would naturally “grow” over the year (YTD) as you continue to receive invoices but typically (unless you receive invoices at a different frequency), your actual invoice amount will “true up” the expense in the following period. But yeah, if there are other items flowing through that P&L acct, it could skew your balances — if they're not appropriately classified as marketing expenses, probably suggest a reclass.

Hope any/all of that helps. If not, good luck anyway!

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[Missy]

A/P is very technically a “type” of accrual but I am fairly certain the OP is talking about an entirely different accrual account used when there is not yet an invoice to enter for the expense incurred. Typically the only transactions that should ever go to AP are invoices and payments. Recognizing other expenses that are incurred but the vendor hasn't sent a bill get a journal entry to accrued expense which is relieved either by a reversal or entering the vendor's invoice. In theory ANYTHING that is sitting in a/p at the end of the period, an auditor should be able to confirm an invoice number date and amount with a vendor. So no invoice=no ap transaction but you do need to recognize the expense.

So lets say you engage in $100 worth of marketing expense in January but the vendor sends a bill on Feb 10. Then You engage in $200 worth of marketing expense in february.

End of Jan
Dr Marketing expense (income statement) $100
Cr accrued marketing expense (balance sheet, but not ap) $100

Bill comes in 2/10, recoroding stays entirely on the balance sheet because its already been recorded to the income statement

Dr accrued marketing expense $100
cr accounts payable $100

Then end of feb for feb exepnses

Dr Marketing expense (income statement) $200
Cr accrued marketing expense (balance sheet, but not ap) $200

At the end of Feb assuming you haven't actually paid the invoice dated 2/10 you have $100 in ap, and $200 in accrued marketing expense and $300 ytd marketing expense on the iS.

The way OPs company is doing it gives the same result and balances but is excessive:

Jan 31 Dr Marketing expense $100
Cr accrued expense $100
Feb 1 Dr accrued expense $100
Cr marketing expense $100
Feb 10 Dr Marketing expense $100
cr A/P $100
Feb 28 Dr Marketing Expense $200
Cr acccrued expense $200

If you write out all the T accounts for the above you end up with $100 in ap, and $200 in accrued marketing expense and $300 ytd marketing expense on the iS, same as above but twice as many steps to get there and it seems the OP is asking why so many steps?

Old timer,  A71'er since 2010.

Finance manager/HR manager

 

 

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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