What is the effect on the financial statements when a company fails to accrue salary and wages expense at year end?

From the purchase of office supplies to the salaries and wages a company pays to its employees, all business expenses must be recorded on a company's books. An expense accrual is the means by which a company ensures that all of its expenses for the period are included on its income statement, also known as the profit and loss statement, or P&L, as charges against income.

Reasons for Accruals

1. An expense accrual is a journal entry that allows a company to include expenses on its books in the period they were incurred. Without an accrual entry, expenses for the period may not be recognized on the company's income statement, since they may not have been paid for in that period or the invoices may not have been received from the vendor by month end.

Accrual Example

1. The income statement shows a company's revenues and expenses by line item for the period. To illustrate the effect that an expense accrual has on an income statement, assume that the bookkeeper of a small manufacturing company keeps a meticulous set of books. On August 15, the company purchases $500 in office supplies from a local vendor. The terms of the suppliers invoice are net 30, or 30 days to pay. The company takes advantages of these terms and makes the payment on September 12.

Expense Accrual

1. The accrual entry to record the expense occurs in August. The entry to the company's books in August will appear as follows:

   Debit Supplies Expense 500 Credit Accounts Payable 500

   The expense of $500 will be included on the company's income statement in August as an offset to income.

Payment

1. On September 12 the journal entry to record the actual payment for supplies will be shown on the company's books as follows:

   Debit Accounts Payable 500 Credit Cash 500

   Notice that, using accrual accounting, the payment only impacts the balance sheet, not the income statement. Accounts payable, a balance sheet liability account, is reduced because the amount is no longer outstanding.

Accruals are adjustments for revenue that has been earned but is not yet posted to the general ledger accounts, and expenses that have been incurred but are not yet posted to the general ledger accounts. Year-end accruals are adjusting entries to make sure revenue and expenses are recorded in the correct fiscal year. 

A revenue accrual does not need to be made if an accounts receivable entry has already been recorded. If cash is received on or after July 1 for revenue that was not recorded in the current fiscal year, please process a revenue accrual. An expense accrual should be made for goods or services provided where the expenditure has not been recorded. Remember an encumbrance is not an expense.

Please reference the KFS Payment Processing E-docs page for specific instructions on the timing for PREQ, DV and PCDO.

There are two year-end accrual object codes (OC). These object codes should only be used at year-end and reversed in July (of the following fiscal year).

• 1999: Year End - Accrued Income
• 2999: Year End - Accrued Expense

Below is an example of revenue and expense year-end accruals. If using the Year End Distribution of Income and Expense (YEDI) e-doc, enter the entries in the To section and the From section for the reversing entry.

Year-end accruals can be posted on two different e-docs, an Auxiliary Voucher (AV) or YEDI. The correct e-doc to use will depend on when the entry is posted. 

• On or before the Auxiliary Voucher (AV) deadline of July 6, use the AV e-doc.
• After July 6, use the YEDI e-doc.

The advantage of using the AV is that it can be scheduled to auto reverse in the next fiscal year. If a YEDI is used, a second entry must be posted in the next fiscal year to reverse the accrual. The reversing entry should be posted in period one (P1) using a Distribution of Income and Expense (DI) e-doc. If a YEDI is used, it is strongly recommended that both entries, the accrual and the reversal, be created at the same time.

Please reference the table below for a summary of which e-doc to use and when, and how to use them.

What is the effect on the financial statements when a company fails to accrue revenue earned at year

What is the effect on the financial statements when a company fails to accrue interest?

What are the effects on the financial statements of failure to take up accrued expenses accrued revenues?

What happens if a company fails to adjust for accrued expenses?