In "It's Always Something, Part 1", we introduced our prepaid expenses system, which allows you to spread an expense over the accounting periods to which it applies, rather than it appearing in just the period it's paid or invoiced. Those of you who have started using the system have probably already seen results-that is, fewer expenses fluctuations and discrepancies when comparing P&Ls with the budget and previous periods.
However, if you've adopted 4-week accounting periods for your foodservice operation, eventually you will be grappling with the problem of having only 12 invoices for an expense that occurs in all 13 periods of the year. Like many operators, you might expense the monthly invoices for 12 periods, and then realize in the 13th period that you show NO amount for a particular expense, even though there most certainly was one.
Consider utilities, for example: They accumulate daily, represent a relatively large portion of controllable expenses, and would be noticed if excluded from the P&L in any one period. So to generate more accurate income statements, you would need to make periodic estimates of the unbilled amounts, accrue those amounts, and make adjustments once the actual invoices were received.
It's a simple concept that can get complicated in the execution, so we developed our own system called "Accruals." It uses estimates based on the historical expense per day multiplied by the number of days that have yet to be billed. Then via a journal entry, the estimated amounts are debited to the appropriate expense account and credited to a liability account (e.g., "Accrued Misc. Expenses") as of the last day of the accounting period. Rather than make a bunch of calculations, we just reverse the journal entry as of the first day of the next period and post the invoices directly to the expense accounts, which adjusts those accounts automatically for any errors in estimates.
Using our "Accruals" system, you can expense and accrue amounts for up to 10 different expense items. You provide information from prior invoices, and the expense estimates and journal entry are calculated for you. Complete instructions are included.