Accruals in Fund Accounting
In fund accounting, accruals refer to the recognition of revenues and expenses that have been earned or incurred but have not yet been received or paid. Accruals are an important part of fund accounting as they allow organizations to accurately track their financial performance and report their financial results in a timely and accurate manner.
In fund accounting, accruals are recorded using the accrual basis of accounting. Under this basis of accounting, revenues are recognized when they are earned, regardless of when the cash is received, and expenses are recognized when they are incurred, regardless of when the cash is paid.
For example, if a nonprofit organization provides services to a client in January but does not receive payment until February, the revenue from the services is recognized in January, even though the cash is not received until February. Similarly, if a nonprofit organization incurs expenses in December but does not pay the bills until January, the expenses are recognized in December, even though the cash is not paid until January.
Accruals are typically recorded using journal entries. For example, an accrual of revenue would be recorded by debiting an accrued revenue account and crediting a revenue account, while an accrual of expenses would be recorded by debiting an expense account and crediting an accrued expense account.
By recognizing accruals in fund accounting, organizations can ensure that their financial statements accurately reflect their financial performance and position, even if there is a delay in the receipt or payment of cash. This provides stakeholders with a more complete and accurate picture of the organization’s financial health.