How to accrue or defer income

This article explains how to accrue income by moving it backwards from one month to another in FreeAgent if you're preparing your accounts using the accrual accounting basis. It also explains how to defer income by moving it forward from one month to another.

Please note that the steps below don't apply if you're preparing your accounts using the cash accounting basis.

When to move income

If you choose to prepare your accounts using the traditional accruals accounting basis, you need to record income that your business earns in your profit and loss account at the time when the business did the work or supplied the goods to a customer, which might not be when the invoice was issued or when the customer paid for the work.

For example, you might invoice a customer after the work has been completed. In this situation, you'd need to accrue the income by moving it back to an earlier month by creating journal entries.

Alternatively, you might invoice a customer before the work is completed. In this situation, you’d need to defer the income in FreeAgent by moving it forward one or more months by creating journal entries.

How to accrue income

You can accrue income in FreeAgent by creating journal entries to move it backwards from one month to another. For example, if you invoiced your customer for £400 in April, but you did the work in March, you’d need to accrue the income in March.

To do this, navigate to the 'Accounting' tab at the top of the screen and select 'Journal Entries' from the drop-down menu.

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Select 'Add New Journal Entries'.

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Next, find the amount that's been recorded late in the income account in FreeAgent, for example ‘001 Sales’. This will be the amount that you charged your customer excluding VAT.

You’ll need to create journal entries dated in the month when you did the work - this is £400 in March in this example:

  • Debit code ‘620 Prepayments’
  • Credit the income code, which is ‘001 Sales’ in this example

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Then, create journal entries dated on the invoice date to move the income from April to March in your profit and loss account by reversing the journals dated in March.

To do this, select ‘Actions’ on the right-hand side of the relevant journal entries and select ‘Reverse in new journal entries’ from the drop-down menu.

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This will create a reversed set of those journal entries. You can choose the first or last day of April for these journals, or exactly a month before the invoice date, and enter a description. If you’re unsure which date to use, please speak to your accountant.

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Select ‘Create Journals’ at the bottom of the screen to complete the process. For more information on reversing journal entries, please see this article.

You will see a record of the journal entries being created and reversed in the ‘Audit Trail’ report.

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How to defer income

You can defer income in FreeAgent by creating journal entries to move it forward from one month to another. For example, if you invoiced your customer for £400 on 1st March, but did the work in April, you’d need to defer the income from March to April.

To do this, navigate to the 'Accounting' tab at the top of the screen and select 'Journal Entries' from the drop-down menu.

Adjust_1.png

Select 'Add New Journal Entries'.

Adjust_2.png

Next, find the amount that's been recorded too early in the income account in FreeAgent - for example, ‘001 Sales’. This will be the amount that you charged your customer excluding VAT.

You’ll need to create journal entries for the amount dated the same day as the date of the invoice, £400 on 1st March in the above example:

  • Debit the income code, which is ‘001 Sales’ in this example
  • Credit code ‘660 Accruals’

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Next, create journal entries dated in the month when you completed the work - April in the above example - to move the income from March to April in your profit and loss account by reversing the journals dated in March.

To do this, select ‘Actions’ on the right-hand side of the relevant journal entries and select ‘Reverse in new journal entries’ from the drop-down menu.

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This will create a reversed set of those journal entries. You can choose the first or last day of April for these journals, or exactly a month after the invoice date, and enter a description in the field provided. If you’re unsure which date to use, please speak to your accountant.

Screenshot_2022-03-21_at_16.15.02.png

Select ‘Create Journals’ at the bottom of the screen to complete the process. For more information on reversing journal entries, please see this article.

A record of the journal entries being created and reversed will appear in the ‘Audit Trail’ report.

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