Deferrals and Accruals

Dictionary meaning of Deferrals is Delays, Postponements and the dictionary meaning of Accruals is Accumulations, Additions etc. Inline with these meanings, I am going to explain these terms in conjunction with two other terms, namely COSTS / EXPENSE and REVENUE / INCOME.
 I am actually going to show the double entry for both, as eventually everything boils to that only and that's what matters in the end!

Deferred Cost and Accrued Cost

Deferred Cost

Deferred Cost / Expense can be any expense which is paid in advance or a purchase made in advance. This literally means that you are deferring (Delaying) the entry in actual cost account in general ledger, as the timing for booking the cost does not match the event. But since you are making that cost, it has to be recorded somewhere in the books and that's where the Deferred Cost / Expense account comes into picture. Deferred Cost / Expense account can be  Prepaid Insurance, Prepaid Rent etc.

Now the cost has already hit the cash / bank account, but the actual cost has not been booked in the account that is specifically selected for that purpose. For e.g. Rent. Insurance etc. So how does this work. Suppose you have made the prepayment for the entire year for Insurance and you want to book the cost of that insurance expense every month. In this case, you pass an entry for the Prepaid Insurance and then reverse the deferrals each month. Enough of talk, lets do the double entry:

In the beginning of the year the entire insurance amount is paid:

DR Prepaid Insurance         1200 INR
      CR   Bank                                      1200 INR

Then in each month, following entry is made hitting the actual expense account:

DR Insurance Expense        100 INR
       CR Prepaid Insurance                  100 INR

In this way the entire deferral amount is cleared by the year end the appropriate expense is booked in the actual expense account at the appropriate time.

In effect the entry after the Prepaid Insurance is knocked off, is:

DR Insurance Expense        1200 INR
       CR Bank                                        1200 INR

Remember : Deferred Cost account is an Asset account.

Accrued Cost (Cost Accruals)

Cost Accruals is nothing but a provision made so that the accounting is accurate and the financial statements reflect the actual picture. There are certain scenarios where the cost has to be accrued.

For e.g. Year end is 31st Dec, but the salary day is 5th of every month, then for the accounts to reflect the correct figures the cost will have to be accrued on 31st of Dec. The entries will be as follows:

DR Wages Expense       100,000 INR
     CR Wages Payable                      100,000 INR ( Cost Accrual)

On the salary day,

DR Wages Payable       100,000 INR (Accrual Reversal)
      CR Bank                                     100,000 INR

In-effect the entry after the Wages Payable is knocked off, is:

DR Wages Expense       100,000 INR
      CR Bank                                     100,000 INR

Remember : Accrued Cost is a Liability account.

Deferred Revenue and Accrued Revenue

These terms are exactly the opposite of what is explained above.

Deferred Revenue

Deferred Revenue is the revenue which is received in advance. Hence while entering this in the books, it should be entered in such a fashion so that the picture that the financial statements display should be neat and accurate. Example of Deferred Revenue is Advance Payment. The double entry for this will be:

DR Bank           50,000 INR
      CR Deferred Revenue (Pre-payment)  50,000 INR

However when the work / service is delivered in parts or in whole, then accordingly the actual revenue will be recognized. The entry for it will be as follows:

DR Deferred Revenue    10,000 INR (1)
      CR Revenue                          10,000 INR (1)

DR Deferred Revenue    10,000 INR (2)
      CR Revenue                          10,000 INR (2)
.
.
.
DR Deferred Revenue    10,000 INR (5)
      CR Revenue                          10,000 INR (5)

This is how the revenue will be recognized in parts as and when the work / service gets delivered. And if it is decided that the revenue is to be recognized at the end of the work / project, then only one entry will be passed .i.e.:

DR Deferred Revenue    50,000 INR
      CR Revenue                          50,000 INR

In effect the entry after the Deferred Revenue is knocked off, is:

DR Bank       50,000 INR
       CR Revenue 50,000 INR

Remember : Deferred Revenue is a Liability Account.

Accrued Revenue (Revenue Accruals)

The need for the Revenue Accruals arises when the revenue (amount) in theory should have hit the bank account, but has still not. But from the standpoint of accurate accounting (matching principle)
for the given period the appropriate provision should be made to reflect the actual revenue for that period, even if the bank has still not received the money. The entry will be as follows:

DR Accrued Revenue       30,000 INR
      CR Revenue                                  30,000 INR

Now when the money starts hitting the bank account; either periodically or in lump-sum, the Accrued Revenue will be reversed.

DR Bank      10,000 INR (1)
CR Accrued Revenue     10,000 INR (1)
.
.
DR Bank      10,000 INR (3)
CR Accrued Revenue     10,000 INR (3)

OR if all the revenue is to be recognized all at once, then:

DR Bank      30,000 INR
CR Accrued Revenue     30,000 INR

In effect the entry after the Accrued Revenue is knocked off, is:

DR Bank       30,000 INR
       CR Revenue 30,000 INR

Remember : Accrued Revenue is an Asset Account.

Thanks !

AXAPTAMANIAC

 

Intercompany Accounting in Dynamics AX 2012

I was going through the requirements for the client that I am working for and it so happened that they require the intercompany functionality. I have never before done this, hence started playing around with the AX 2012 R2 system in my oracle virtual box. This is what I concluded.

1. Create the Receivables and Payables Ledger accounts in the Chart of Accounts of all the involved companies.
2. Create the Customer and Vendor posting profiles. There should be separate lines for all the intercompany Customers and Vendors, if the client wants to track the intercompany funds separately for each company.
3. In step 2, select the accounts defined in step 1 for each individual line in the setup section of the posting profile record.
4. You are ready to go for intercompany Sales Orders and Purchase Orders now. The settings are such that the transactions will be tracked individually for each associate company.
5. The same settings work well when used for Free Text Invoice. Out client wanted invoice to be created for any non-trade transaction between the two associate companies. Free text invoice was a very good suggestion in that case.
6. Now suppose the companies are passing intercompany journals as well, then they can do so by passing a General Journal, but selecting the different company while defining the offset account.
7. However this  ONLY works when the Intercompany Accounting setup is defined in the GL module.
8. Navigate to GL > Setup > Posting > Intercompany Accounting and define the same payables and receivables account for the appropriate companies that were created in step 1 above. Also the user needs to define the journal that will be automatically posted, from the drop down. This can be a normal General Journal
9. Some may also insist creating a separate Intercompany Journal, so that its easy for tracking. Imagine all types of journals being posted as General Journal. Its difficult to track the purpose. Hence it is advisable to create a separate Intercompany Journal.
10. But remember the same setup has to be done in all other associate companies so that this functionality works well.
11. Once the setup is complete and the General Journal is posted, the system posts two vouchers one in the parent company and other in the associate company.

For e.g.:

Company A has to book some expense on Company B, then a General Journal can be created in Company A:

Dr  Car Expense 120 (Company B)
   Cr  Bank 120 (Company A)

When the above journal is posted, then system automatically posts two transactions:

Company A:

Dr Receivables from B  120
    Cr Bank 120

Company B:

Dr Car Expense 120
   Cr Payable to A 120

This can then be settled by passing a payment journal OR this can be settled by a similar reverse journal from Company B.

As far as the intercompany Sales and Purchase orders are concerned they will behave exactly same as the normal trade Sales and Purchase orders, only difference being there amounts will be tracked separately in the summary / control accounts defined in the customer and vendor posting profiles. Also the payments will also be done through the normal payment journals.

Thanks!

AXAPTAMANIAC


 

Foreign Currency Revaluation in Dynamics AX 2012

I tried to run through this process in Dynamics AX 2012 R2 and following was the process and related findings.

1. First I setup all the accounts namely:
1. Unrealized Profit (Asset)
2. Unrealized Loss (Liability)
3. Realized Profit (Revenue)
4. Realized Loss (Expense)
2. Then I created a foreign currency in the system and also entered the exchange rates for the same for few days.

I basically wanted to see when these accounts are hit when the transactions related to foreign currency are posted. I did post two type of transactions namely:

• One without using the Unrealized Profit/Loss accounts
• One with Unrealized Profit/Loss accounts

Now what does this mean. This means that I tried the foreign currency transactions one with Foreign Currency Revaluation Process and one without Foreign Currency Revaluation Process.

For the transactions where I did NOT ran the foreign currency revaluation process, the Realized Profit / Loss accounts were direct hit. for e.g.:

I posted an AP Invoice journal in foreign currency. Then immediately after that I posted the AP Payment journal for the same, but on a different date with different exchange rate. This time the transaction was posted but directly hitting the Realized Profit and Loss accounts.

Then I tried to change the process a bit, by introducing the Foreign Currency Revaluation process in it. This time I posted an AP Invoice Journal and then I ran the Foreign Currency Revaluation process for a different date with different exchange rate. The posting that happened this time hit the Unrealized Profit / Loss accounts. Accordingly they also hit the control accounts (Trade Creditors in case of Vendor Account and Trade Debtors in case of Customer account). After this I posted the AP payment journal. After the payment journal was posted, it hit the Realized Profit / Loss account and at the same time reversed the entries in the Unrealized Profit/Loss account.

So the conclusion is the entries registered in the Unrealized Profit  / Loss accounts are nothing but a provision to accommodate the fluctuating exchange rate. This also makes the Balance sheet more accurate, as you have made a provision for the potential profit and loss that may or may not occur in future due to change in exchange rate.

It is not mandatory to use the Unrealized Profit / Loss accounts on a monthly basis during the monthly closing. Some companies only use Realized Profit / Loss accounts for the entire year and at the end of the year they will run the Foreign Currency Revaluation to make provision for the unrealized profit and loss.

Hope this was useful enough. Till next time happy exploring new things in AX.

Thanks!

AXAPTAMANIAC