A March service, an April invoice.
The invoice date is only one part of the month-end record. An expense can belong to a period that has ended before the invoice is received.
At the March close
Assume a business received a service entirely in March, expects a $6,000 invoice and prepares its management reports on an accrual basis. The amount is supported by the agreed service price. Sales tax is omitted from this example.
At the March close, the accounting entry records $6,000 of service expense and a $6,000 accrued liability. The supporting schedule names the supplier, the service period, the amount and the reason the invoice is outstanding. That schedule gives the next close something specific to clear.
Illustrative March service accrual
A $6,000 March service is invoiced in April. This example assumes an accrual basis, a supportable estimate and an expense that belongs entirely to March. Sales tax is omitted.
March close
Recognize the March service
- Service expense
- Debit$6,000
- Accrued expenses
- Credit$6,000
March carries the $6,000 expense and a $6,000 liability while the invoice is outstanding.
April invoice
Clear the existing accrual
- Accrued expenses
- Debit$6,000
- Accounts payable
- Credit$6,000
The invoice matches the estimate. Reclassifying the liability avoids recognizing the same $6,000 service expense again in April.
March: $6,000 service expense and accrued liability. April: matching invoice transfers that liability to accounts payable.
When the invoice arrives
In April, the invoice confirms the same $6,000 service cost. The invoice should clear the existing accrual and establish the amount in accounts payable. Recording another $6,000 of April expense would count the same service twice.
The journal sequence depends on the accounting system. A business may reverse recurring accruals before entering invoices, or clear an accrual directly. Either approach needs a check that the March cost appears once and that the liability has moved to the correct account.
When the invoice differs
If the invoice is for $6,300, the difference needs examination. It might correct the estimate, include an additional service or relate partly to another period. The appropriate treatment depends on those facts, the reporting status of the earlier period and the business’s accounting policy.
An old accrual should not remain on the schedule solely because a supplier’s invoice uses different wording. Match the supplier and service period, investigate the amount and retain an explanation of the treatment.
At the next review
Check the remaining accruals for invoices already posted, estimates that need updating and services that did not occur. Each remaining balance should still have a reason to be there.