To ensure that your accounts give as accurate a view of your business as possible, you must allocate income and expenses to the correct period. This is normally called ‘accrual’. Large companies often carry out such an assessment every month when the accounts are closed at the month-end. If you run a small business, it will generally be sufficient to do this at the end of the year.
Eksempelbedriften AS pays both rent and insurance premiums in advance on 1 January and 1 July. Without accrual, the expenses in January and July would have been disproportionately high. Eksempelbedriften AS reports internal monthly accounts and wants them to be as accurate as possible. Rent and insurance premium expenses are therefore allocated in the accounts every month.
Other typical accrual items are income, depreciation, stock changes, electricity, insurance and interest.
Income must be recognised in the accounts during the period in which it is earned. If you have carried out an assignment or sold a product but do not send an invoice for the sale until after the end of the month, you must accrue this in your accounts. The opposite applies if you have sent and posted an invoice in advance. You must then accrue the income out of the income statement.
You must also ensure that you deduct expenses that you actually incurred during the period in order to generate the income.
Trading of commodities
If you trade commodities, you must deduct expenses which you have incurred for the goods you have sold. For example, if you have a lot of goods in stock, it would be wrong to make deductions for these. They have not yet been sold or generated income for the business. It is therefore important to have an overview of your stock at the end of a period if you have goods of any significance in stock. Large commodities trading companies often have stock management systems which maintain an overview of stocks at all times, and carry out stocktaking once a year as a means of checking and adjusting the stock system.