Lesson 2 of 6
Accruals and deferrals
7 min
The accrual principle says expenses and revenues belong in the period they relate to, not the period cash moves. An accrual records an expense or revenue that has been incurred but not yet invoiced: the May electricity bill that arrives in June. A deferral pushes a payment already made into the periods it covers: a 12-month software subscription paid in January. Both are standard close tasks, and both are among the easiest to get wrong because they are often keyed by hand.
| Accrual | Deferral | |
|---|---|---|
| Cash timing | After the period (invoice not yet received) | Before the period (paid in advance) |
| Balance sheet line | Accrued liability (or accrued revenue) | Prepaid expense (or deferred revenue) |
| Contoso example | May utility costs at the Detroit plant, invoice due in June | 12-month maintenance contract paid in January |
| Typical reversal | Reverse on day 1 of next period, then post the real invoice | Release one twelfth each month until the balance is zero |
Three ways to post them
Manual journal entry with reversal. The G/L accountant posts the accrual with the Post General Journal Entries app and sets a reversal date and reason, so the system can reverse it on the first day of the next period. Mass reversal (transaction F.80) reverses a batch at once. This is simple and fully visible, but it depends on people remembering every item each month.
Recurring entries. For fixed amounts, such as a monthly rent accrual or a prepaid release, a recurring entry document (transaction FBD1) holds the posting pattern and the recurring entry run (F.14) creates the journal entries each period. Recurring entries do not calculate anything; they repeat a fixed amount.
Accruals Management. SAP S/4HANA includes an Accrual Engine with two components that matter here. Manual Accruals let you create an accrual object with a validity period, a total amount, an accrual method and cost objects; the engine spreads the amount and posts each period. Purchase Order Accruals create an accrual object for each relevant purchase order item and propose accruals from the delivery schedule (or straight-line over a service period), with an optional review and approval step. Period-end postings run through the accrual posting run (ACEPOSTINGRUN), and the postings sit in the Universal Journal like any other line item.
- Purchase order createdAn accrual object is created in the Accrual Engine for the item
- ProposalExpected cost for the period from the delivery schedule or the service period
- Review and approvalOptional: purchaser or cost center owner adjusts and approves
- Posting runAccrual posted for the period with the cost center or order from the PO
- Invoice and goods receiptActual costs reduce what remains to accrue
Reversal at period start
Most accruals are posted as "reverse on the first day of next period." The reasoning: on June 1 you reverse the May estimate, and when the real invoice arrives in June it posts in full. The net effect in June is the difference between estimate and actual, and May carries the best estimate. If the reversal is forgotten, June shows the expense twice. If it is posted with the wrong date, May shows nothing. Both happen in real life, which is why reversals belong on the close checklist with their own evidence.
Accrual Engine postings carry their own reference procedure, so you can find and reverse them as a group. For a single accrual object, reverse it from the object itself rather than reversing a whole journal entry that may hold lines for other objects.
| Method | Best for | Watch for |
|---|---|---|
| Manual entry with reversal date | One-off estimates | Missing reversal; wrong reversal date |
| Recurring entry (FBD1 / F.14) | Fixed monthly amounts | Run forgotten; end date not set |
| Manual Accruals (Accrual Engine) | Contracts spread over time | Accrual method and cost object on the object |
| Purchase Order Accruals | Services and deliveries ordered but not invoiced | Approval not done before the posting run |
Choosing an accrual method.
What would you do?
Maria notices that Contoso's June P&L shows two months of the warehouse lease at the Chicago plant. The May accrual was posted on May 31 by the G/L team. What is the most likely cause, and what should you test next?
- Accruals record incurred but uninvoiced costs; deferrals spread amounts paid in advance.
- Use manual entries with reversal dates for one-offs, recurring entries for fixed amounts, and Accruals Management for contracts and purchase orders.
- Reverse accruals on day 1 of the next period, and check that the reversal posted.
- Check GR/IR before keying manual accruals for purchased items to avoid double counting.
Check your understanding · not graded
Lesson check
1. A 12-month insurance premium is paid in January. What is the right treatment?
2. What happens if a month-end accrual is not reversed and the real invoice posts next month?
3. Which transaction posts period-end amounts from the Accrual Engine?
4. What do recurring entries NOT do?