Accrue costs that haven’t been paid for yet

This article explains what accruals are and how to record them in FreeAgent. It also explains how to reverse an accrual.

What is an accrual?

If you need to record costs that your business incurs on your profit and loss account at the time when the business uses what it's paid for, which wasn't when the cost was paid for, you need to record an accrual.

For example, you might pay a $300 electricity bill for your business's office on 1st May 2021, which covers electricity that the business used over a three-month period between 1st February and 30th April 2021.

So if your business prepares accounts to 31st March each year and you only include your electricity bill in your accounts when you pay it on 1st May, the $200 worth of monthly costs for February and March will be missing from your accounts to 31st March 2021. This would mean that your profit would be too high and you might pay too much tax, as part of your electricity payment relates to February and March 2021.

Therefore, you need to record the $200 of electricity costs for February and March on your profit and loss account as at 31st March 2021 by recording those costs as an accrual.

As the $200 will then be paid for in the accounting year to 31st March 2022, you'll need to remove it from your profit and loss account for that year by reversing the accrual.

If you’re unsure about how to record an accrual, please speak to your accountant.

How to record an accrual in FreeAgent

You can record an accrual in FreeAgent by creating journal entries.

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

Next, select 'Add New Journal Entries'.

For the example above, you would need to create two journal entries for the original accrual of $200, dated 31st March 2021:

• Debit the code where the cost will be recorded in your accounts. In the example of an electricity bill, this is ‘250 Office Costs’.
• Credit code ‘660 Accruals’.

How to reverse the accrual

On the first day of the new accounting period, you need to reverse the accrual to remove the value allocated to the earlier period from your profit and loss account in the current year.

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

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

This will create a reversed set of those journal entries. Choose the beginning of your new accounting year as the date of the reversal - this is ‘01 Apr 21’ for the electricity bill example - and enter a description in the field provided.

Select ‘Create Journals’ at the bottom of the screen to complete the process. Find out more about how to copy or reverse journal entries.