Accruals and Prepayments

Cash Accounting vs. Accruals Accounting

Cash Accounting vs. Accruals Accounting

Clubtreasurer is designed as a modified cash accounting system which meets the requirements of most small clubs and organisations. In simple terms, this requires organisations to create accounting entries only when cash is physically paid-out or receipted. For most organisations, using standard Receipts & Payments to record cash-in and cash-out transactions is perfectly adequate for your needs.

Some organisations, however, will want to produce their accounts using accruals and prepayments.

Accruals are costs or income incurred but not yet paid or receipted.
Prepayments are costs or income paid in advance but not yet incurred.

You use accruals/prepayments to allow for the timing differences between cost/income incurred and paid. The following example illustrates how cash accounting and accruals accounting differ:

Club A purchases and uses new sports kit 1st January, but does not pay the supplier until 5th February.
- Using cash accounting Club A would record both the expenditure transaction and cash payment from Bank a/c in February (ie. when paid). This method ignores the fact that the kit purchase incurred in January.
- Using accruals accounting the expenditure would be recorded in January (shown in Profit & Loss) and a liability/creditor balance would be created for the debt. When the supplier payment is made in February, the liability/creditor balance is reversed and the Bank A/c is reduced to reflect the payment.

Recording Accruals and Prepayments in Clubtreasurer

Clubtreasurer allows you to record simple accrual/prepayment transactions and, if required, will also allow you to manage more complex scenarios.

Tip: if you are entering accruals/prepayments retrospectively, you will need to edit or delete existing transactions and/or enter new accrual/prepayment transactions. Because some of these will be in a prior year you will also need to temporarily move your Financial Year (Setup > Organisation and Subscription) setting back to unlock the prior year.

Simple Accrual/Prepayment Methods

Two special Accounts for *DEBTORS and *CREDITORS have been created to allow you to record receipts owed or payments due. You can create additional Debtor or Creditor Accounts using the *DEBTOR or *CREDITOR Account Types.

When recording simple accrual/prepayments just create normal Receipt/Payment transactions using the *DEBTORS and *CREDITORS Accounts to temporarily record owed or due amount transactions. This will create balances in your Debtor or Creditor A/cs and allow you to report and manage them

Debtor and Creditor account balances will show as Current Assets and Liabilities, respectively, in your Balance Sheet / Statement of Assets and Liabilities.

Once cash is received or paid you could simply adjust the Receipt/Payment transaction(s) to reflect the correct Date and Bank/Cash Account; However, this method is not recommended because it does not correctly record when cash payments or receipts are made, nor maintain an audit.

A much better way is to use Clubtreasurer’s ability to Reverse* the Receipt/Payment transaction(s) to clear Debtor/Creditor A/c balances, and create new Receipt/Payment transaction(s) to record the actual Date and Bank/Cash Account. The way you do this is different between accruals and prepayments – this can seem a little daunting at first but the following examples will walk you through the 4 scenarios in detail:

*See Receipts & Payments help page for more information on reversing transactions.

Scenario 1: Expense Accruals

Requirement: You need to accrue for £100 food & drink costs that were incurred in January, but not yet paid. The expense should appear on the P&L in January and show a liability (creditor) balance for the accrual in the Balance Sheet. In February, the expenses are paid to the supplier and the liability is reversed and cash/bank balance is reduced.

Step 1: In January, record the Expense Accrual by creating a new Payment transaction against your Creditor A/c when occurred.

Your January P&L will now show a £100 charge against Food & Drink Expenses, and the Creditor balance will show under liabilities in your Balance Sheet:

	Date			Receipt/Payment & Cost Code		Account	Amount
	10-Jan			Payment – Food & Drink Expenses		Creditor A/c	£100

Step 2: In February, when the supplier is paid:
- 2.1: Open and Reverse the original January Expense Accrual Payment transaction (Use the “Reverse” button):

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Feb			Payment – Food & Drink Expenses		Creditor A/c	– £100

2.2: Create (or Import) a new Payment transaction against your Bank A/c. Note this cancels out the Food & Drink Expense so it correctly shows as zero on your P&L in February. The liability balance is also cancelled out and the Bank A/c balance now shows the cash has been paid out.

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Feb			Payment – Food & Drink Expenses		Bank A/c	£100

TIP: If your accrual from Step 1. was included in an opening creditor balance and no actual transaction exists then you can combine Steps 2.1 and 2.2. into an Account Transfer:
– FROM the Cash/Bank Account the accrual was paid out of
– TO the Creditor Account.

Scenario 2: Revenue Accruals

Membership fees for John Smith are due in January for £50. You need to recognise the membership income in your January P&L, but as John has not yet paid these you must show this as a Debtor balance in your Balance Sheet. John pays his membership late in March and you now need to remove the Debtor balance and record the cash received into your Bank A/c.

Step 1: In January, record the Receipt Accrual transaction by creating a new Receipt transaction against your Debtor A/c when the membership is due:

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Jan			Receipt – Membership Receipts		Debtor A/c	£50

Step 2: In March when John pays:
- 2.1: Open the original January Receipt Accrual transaction and create a reversing transaction (click Reverse button).

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Mar			Receipt – Membership Receipts		Debtor A/c	– £50

2.2: Create (or Import) a new Receipt transaction against your Bank A/c:

	Date			Receipt/Payment & Cost Code		Account	Amount
	15-Mar			Receipt – Membership Receipts		Bank A/c	£50

Scenario 3: Expense Prepayments

Choose one of the 2 Methods below for Expense Prepayments. You must use Method 1 if you import your bank statements via the Import Transactions process.

You have paid for £100 Rental Costs in advance in January but they will not be incurred until February. This should be reflected in the Bank A/c and Debtors balances in January Balance Sheet, but the expense should not show in the P&L until February. Also, the Debtor balance should be cleared in February.

Expense Prepayments – Method 1

Step 1: In January
- 1.1: Create a normal Payment transaction to record the payment made from your bank account:

	Date			Receipt/Payment & Cost Code		Account	Amount
	15-Jan			Payment – Rental Costs		Bank A/c	£100

1.2: Create an equivalent Expense Prepayment (Payment) transaction with the same Date and Cost Code, but select a Debtor A/c and, importantly, enter a negative value £-100 (minus £100)

	Date			Receipt/Payment & Cost Code		Account	Amount
	15-Jan			Payment – Rental Costs		Debtor A/c	– £100

Step 2: In February, open and Reverse the January Expense Prepayment transaction:

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Feb			Payment – Rental Costs		Debtor A/c	£100

Expense Prepayments – Method 2
This method cannot be used if you create your transactions using the Import Transactions feature.

Step 1: In January, create an Account Transfer transaction from Bank A/c to Debtor A/c when the expense is paid.

	Date			Account Transfer From		Account Transfer To	Amount
	15-Jan			Bank A/c		Debtor A/c	£120

Step 2: In February, when the expense is incurred create Payment transaction from Debtor A/c

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Feb			Payment – Rental Costs		Debtor A/c	£120*

*If you need to spread the prepaid cost over a number of periods – for example you have paid an annual rental expense and need to charge 1/12th cost to each month throughout the year – then you would repeat Step 2 for every month of your year and charge £10 (£120/12) to each month (or whatever portion is required). As you move through the year your Debtor balance will reduce to zero on the final month.

Scenario 4: Revenue Prepayments / Deferred Income (monies received early)

Choose one of the 2 Methods below for Revenue Prepayments. You must use Method 1 if you import your bank statements via the Import Transactions process.

In December, you received £250 in advanced Membership payments due in January. You need to record the advanced payment into your Bank A/c as well as in your Creditor A/c to reflect the liability. In January you can recognise the payment in your P&L and clear the liability balance.

Revenue Prepayments / Deferred Income – Method 1

Step 1: In December

1.1: create or import a Receipt transaction to record the advance membership payment(s) made into your bank account:

	Date			Receipt/Payment & Cost Code		Account	Amount
	20-Dec			Receipt – Membership Income		Bank A/c	£250

1.2: then, create an equivalent Revenue Prepayment (Receipt) transaction with the same Date and Cost Code, but select a Creditor A/c and, importantly, enter a negative value £-250 (minus £250)

	Date			Receipt/Payment & Cost Code		Account	Amount
	20-Dec			Receipt – Membership Income		Creditor A/c	– £250

Step 2: In January, open and Reverse the December Revenue Prepayment transaction:

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Jan			Receipt – Membership Income		Creditor A/c	£250

Revenue Prepayments / Deferred Income – Method 2
This method cannot be used if you import your prepayment transactions using the Import Transactions feature.

Step 1: In December, create an Account Transfer transaction from Creditor A/c to Bank A/c when monies are received.

	Date			Account Transfer From		Account Transfer To	Amount
	20-Dec			Creditor A/c		Bank A/c	£250

Step 2: In January, create a Receipt transaction for the Membership payment against Creditor A/c when the event is run.

	Date			Receipt/Payment & Cost Code		Account	Amount
	1-Jan			Receipt – Membership Income		Creditor A/c	£250

Managing Accrual & Prepayment Opening Balances

Adding New Opening Accruals/Prepayments Balances
Step 1: With the simple accruals & prepayment method you simply enter an opening balance for your Debtor / Creditor Accounts as appropriate.

Step 2: When an accrued payment is made, for example, just create an Account Transfer from your Cash/Bank Account to the Creditor Account. This will reverse your b/fwd creditor balance and record the cash payment out of your Cash/Bank Account. You won’t need to create a Receipt or Payment transaction because accruals do not affect this year’s Profit and Loss account.

Adding Opening Accruals/Prepayments Balances Retrospectively
If you didn’t enter your opening accrual & prepayment balances when first setting up your accounts and now need to do this, the process is similar but has additional steps:

Step 1: Firstly, you may need to temporarily set your Financial Year-End to a date earlier than the o/bal date (Setup>Organisation) because the Accounts may be age locked.

Step 2: Open your Debtor/Creditor Accounts and update the Opening Balance details as appropriate.

Step 3: You will then need to adjust the current year accounts to correct the accrued transaction. For instance, if you have brought forward an expenses accrual (Creditor A/c balance) then you would need to:

3.1: Delete the corresponding Payment transaction(s) made this year made from your Cash/Bank Accounts. This is because these are accrued expenses which were incurred last year, and should not hit this year’s P&L.
3.2: Instead, create an Account Transfer from your Cash/Bank Account to the Creditor Account. This will reduce your b/fwd Creditor balance and record the cash payment out of your Cash/Bank Account so that the balance is corrected. Account Transfers do not hit your P&L.

Advanced Accruals & Prepayments (BETA)

This feature is currently under a beta programme. Please raise a Support Ticket if you would like access to this.

You can also manage more complex accruals or prepayments that follows the accounting ‘matching principle’. This determines when income and expenditure should hit your P&L account and Balance Sheet.

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Accounting for Funds held on behalf of Members for 3rd-Party Purchases

Scenario:
Requirement: Your club provides a free service to allow members to purchase club kit. The club collects kit orders and monies on behalf of its members, and places bulk orders to the kit supplier. Importantly, the club is only facilitating the ordering process; it therefore needs to record the member receipts into its bank account as liabilities/creditors and importantly does NOT want to show the supplier payments in its P&L account as they are not club transactions.

When kit monies are collected from members, create Account Transfer transactions from Creditor A/c to Bank A/c. If you have already entered or imported these as a normal Receipt Transactions you can bulk convert them into an Account Transfer – see below
- Dr Bank A/c (BS)
- Cr Creditor A/c (BS)
When suppliers purchases made just create an opposite Account Transfer transactions from Bank A/c to Creditor A/c. If you have already entered or imported these as a normal Receipt Transactions you can bulk convert them into an Account Transfer – see below
- Dr Creditor A/c (BS)
- Cr Bank A/c (BS)