Canada Accruing for operating expenses

[LCody]

Question:
When booking accruals for operating expenses the business provides the spending estimates by activity month and by spending category (not specific to each vendor). In order to calculate the accrual each month I need to view the actual invoices that were coded to the same spending category for the specific activity month. To avoid a significant burden in tracking all invoices against the estimates an accrual by specific month is only held for 4 months and then dropped (assumed that most invoices are received by then).

The problem is that invoices from vendors are not always matching to the activity month that the business estimated the expense which causes a mis-match. The other problem is some vendors take longer than 4 months to send an invoice.

How do you guys manage accruals for your operating expenses? Do you book them cumulative for a rolling 6 month window or something like that to avoid invoice differences from an activity month perspective?

I also don't know what the right level is to book an accrual to in order for the best analysis. Should accruals be booked and tracked at the lowest general ledger account or some other means?

Appreciate any help!

 

[kirby]

Accruing income and expense accurately is the whole ball game to make accrual accounting distinct (and more accurate than ) from cash basis accounting. It takes work to get this right. Look at one account over a 12 month period. Does it fluctuate wildly or is it reasonably steady? Now to find out why in either case you have to list the items in the account to see what's going on. (download the data). HOPEFULLY, the 80-20 rule will be in effect where 80% of the expense is caused by 20% of the transactions. Then you can focus on understanding in detail the 20%. Let's say you find that there is a monthly billing - say the telephone bill - which SHOULD be paid each month. if you find it is missing then accrue it. And keep that accrual there until the missing bill is paid. (as you learned above you just can't assume it will get paid in 4 months) Go further by finding out WHY bills are not getting paid. Phone bill is a good example because if not paid - there goes your phone service! Anyway, once you start accurately accruing then you can rely on the monthly expense in an account being accurate. Then you can reduce your effort because the prior month expense will be the model for what the current month expense should look like. Now instead of having to check detail on ALL accounts you can just check on the exceptions. Takes work to get there but that's why you get paid the BIG BUCKS!