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Accounting for Accruals and Deferrals What are they and why do we do them?

Each year, the University is required to issue a report on its financial condition for use by a broad
audience, including the federal government, the Massachusetts Attorney Generals Office, rating
agencies, bondholders, donors, and alumni. This report includes a balance sheet and a change in
net assets statement (the non-profit equivalent of a profit-and-loss statement). These financial
statements must be produced in compliance with Generally Accepted Accounting Principles
(GAAP).
GAAP requires that the University include in its financial statements expenses that are incurred
during the year, as well as income earned during the year. As such, there may be transactions that
occur in the following fiscal year that must be reported in the current fiscal year. To accomplish
this, we process accruals for payables that are outstanding at June 30th, receivables for income
that is outstanding but earned, as well as entries for deferred revenue and prepaid expenses. To
ensure accurate financial statements, we are required to record these adjustments for all material
transactions. We have set the materiality threshold at $5,000; therefore, adjusting entries must be
processed for applicable transactions of $5,000 or more. In general, these entries are processed
by a tubs central financial office, although the central tub office often relies upon departmental
administrators to provide information needed to complete these entries.
When you pay a bill, the expense is recorded in the General Ledger; when you receive a payment
for a service or good, the income is recorded in the General Ledger. At the end of each year, we
need to make sure that expenses are recorded for all goods or services you have received during the
year. We also need to make sure income is recorded for all goods or services you have provided
during the year. To ensure expenses and income are recorded in the proper year, the following
adjustments are required:
For expenses:
o An entry should be recorded when a good or service has been received in the current
fiscal year but will not be paid for prior to year-end. This entry is called an accounts
payable (A/P) accrual; it debits an expense for the related amount and credits accounts
payable on our balance sheet.
o An entry should be recorded when a bill has been paid in the current fiscal year for a
good or service that will not be received until the next fiscal year. This entry records
a prepaid expense; it debits a prepaid expense object code on the balance sheet and
credits the expense object code from which the bill was paid.
For income:
o An entry should be made when a department has not received income owed to it by
year-end for goods or services provided by the department during the current fiscal
year. This entry is called an accounts receivable (A/R) accrual; it debits an accounts
receivable object code on the balance sheet and credits the appropriate income object
code.
FAS Office of Finance 1
Accounting for Accruals and Deferrals What are they and why do we do them?
o An entry should be recorded when revenue has been received in the current fiscal year
but the department will not provide the good or service until the next fiscal year. This
entry records deferred revenue (unearned income that should be included in income in
the following year); it debits the income object code where the revenue has already been
recorded and credits a deferred revenue object code on the balance sheet.
In short, these adjustments allow expenses to be reported when incurred, not paid, and income to be
reported when it is earned, not received.
The following are general rules regarding A/P (expense) accruals:
Accounts payable accruals should be made for items where a good or service has been
received in the current fiscal year but will not be paid for prior to year-end. This includes
items for which an invoice has been received but not paid, as well as items for which an
invoice has not yet been received. If an invoice has not been received, then the department
should process the accrual based either upon the known cost or an estimated cost if one can
reasonably be calculated. Any such costs that are for $5,000 or more must be accrued.
Departments should not delay processing these expenses because of a lack of funding.
Departments should consult with their financial office if there is a funding issue.
Example: A department orders and receives two computers at the end of June. However,
the bill is not received until July and is not processed until August. Because the computers
were received in June, an A/P accrual journal for these expenses should be processed. This
accrual would debit the appropriate 33- digit expense coding and would credit the balance
sheet accounts payable liability coding.
The following are general rules regarding prepaid expenses:
Prepaid expenses should be recorded for items where a bill has been paid in the current
fiscal year for a good or service that will not be received until the next fiscal year. Prior
to year-end, the department should determine what expenses have been paid for goods or
services that will not be received until after June 30. Any such amounts that are for $5,000
or more must be recorded as prepaid expenses.
Example: A department pays a vendor for elevator maintenance for the period from May
1 of this year through April 30 of the following year. Since two months of this period are
in the current fiscal year and ten months are in the following fiscal year, a journal should
be processed to record 10/12ths of the contract cost as a prepaid expense. The entry would
debit the balance sheet prepaid expense coding and would credit the appropriate 33-digit
expense coding.
The following are general rules regarding Accounts Receivable (A/R):
FAS Office of Finance 2
Accounting for Accruals and Deferrals What are they and why do we do them?
Accounts receivable should be recorded when a department has not received payment by
year-end for income owed to it for goods or services provided by the department during
the current fiscal year. Prior to year-end, the department should determine what income
has been earned in the current fiscal year and whether it has been fully collected/received.
Any amounts not received by year-end should be recorded as accounts receivable in June.
If the amount due is not exactly known, an estimate should be calculated and posted to the
General Ledger. Any such amount of $5,000 or more must be recorded.
As long as the receivable transaction is processed through the Oracle General Accounts
Receivable system by June 30, no journal entry is necessary. The A/R system properly
records the A/R accrual and income. If the transaction has not been processed by June 30,
a journal entry should be recorded. For income received that is processed through the Cash
Management Office, if the payment is not received before June 30, a journal entry should be
recorded.
Example: A department provides services to an outside institution in May, but doesnt
receive payment from the customer until July. Because the service was provided in the
current fiscal year, an A/R journal for this income should be processed. This entry would
debit/charge the balance sheet accounts receivable coding and would credit the appropriate
33-digit income coding.
The following are general rules regarding deferred revenue:
Deferred revenue should be recorded when revenue has been received in the current fiscal
year but the department will not be providing the good or service until the next fiscal year.
Prior to year-end, the department should determine what income has been received in the
current fiscal year where the good or service is not going to be provided until after June 30.
Any such amounts of $5,000 or more must be deferred.
Example: A department receives tuition income in May for an executive education course
that will be held during the last two weeks of July. Since this income relates to a course that
will be held in the following fiscal year, a journal should be recorded to defer this revenue.
The entry would debit/charge the appropriate 33-digit income coding and would credit the
balance sheet deferred revenue coding.
FAS Office of Finance 3

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