Cash, Accruals, Prepayments, Accrued Expenses & Income, Income Received in Advance, Prepaid Income AAAGH!!

What does it all mean? When do I use which one? 

All this “Accounting-ese” words can confuse.
However, these words are especially important at year end; a time that is already busy, confusing and stretching in many ways!
Hopefully the following notes will simplify and clarify these terms and help you know when to use them in a small-medium church setting. 

Background and context …
An organisation’s financial management works on a cash or accruals basis. 

Cash Basis
Transactions (Payments and Receipts) are allocated to income & expense accounts in the period they are paid or received. Monthly financial reports are produced the income and expenses are calculated based on the amounts that were received or paid that month regardless of what period they relate to. 

Using the Church Camp as an example.
Using a Cash Basis the income and expenses of a church would increase based on when: 

• People paid for their camp registrations – lump payments or payment plan 
• Invoices were paid – especially deposits for the church camp, travel food etc  
• The actual camp could be months in the future, even in the next financial year! 

Accruals Basis 

Income and expense are recognised in the month to which they relate (regardless of the cash movement).  

To enable this we use: 

1. the Accounts Payable & Receivables functions of our accounting systems 
2. Prepayments, Accruals, Accrued Expenses, Income Received in Advance, Accrued Income – let’s just call them PAAEIRA’s Accounts 

Using the Church Camp as an example. 

Using an Accruals Basis the income and expenses of a church would only increase in the month of the Camp  

• Registrations received before the event would be allocated to the Income Received in Advance Account 
• Payments made before the camp will be allocated to the Prepayments Account 
• In the month of the event, the total of all the monies received and the total of the monies paid would be journaled out of the Income Received in Advance and Prepayments accounts and into the appropriate Income and Expense accounts

Very small organisations usually work on a cash basis only, while large organisations/corporates work on a completely accrual basis. For example, large organisations will split telephone bills into their exact months and create monthly journal transactions to accrue and reverse journals 

We recommend that small/medium churches operate on a mixture of cash & accrual basis. We recommend the following: 

• Property Rentals – Accruals – use the Customer Invoicing function in your accounting system to manage your accounts receivables. You can choose to send the invoices or not 
• Supplier Bills – Accruals – use Accounts Payable function in your accounting system to process bills – in general, use the Supplier Invoice date as the purchase/bill date 
• Donations – Cash 
• Payroll – use the Payrun payment date 
• Camps or major events 
  • use Prepayments/Prepaid Expense Account for payments 
  • use Income Received in Advance 

Year End
At financial year-end it is common and proper to calculate, and make some adjustments to the financials accounts, for expenses and income related to the closing financial year although the transactions maybe in process and/or have not been completed by the closing date.
Monies received in advance of service delivery must be recorded as Income Received in Advance (liability)
Monies paid in Advance of receiving the goods or services must be recorded as Prepayments (asset) 

 .   Managing Prepayments/Prepaid Expenses at financial year end 

Expenses prepaid need to be transferred to the balance sheet accounts: 

• prepayments is an Asset 
• for an expense that is paid before the period in which the activity occurs or items are delivered 
• For example 
  • Insurance for July-June, paid in June 
  • A payment made for an event that your church is organising and will occur in the future – eg deposit for a youth camp or conference 

Income Received in Advance/Prepaid Income 

• Is a Liability – you have the money and are still liable to do something with it 
• Is used when monies have been received for a future event/period. 
• For example 
  • Rent received for future period 
  • Donations received and not yet transferred to the donee organisation 
  • Registration payments received for a youth camp or conference 

 Accrued Expenses 

• Is a Liability – it is still to be paid 
• Transactions that have not been paid or entered in the Accounts Payable system are allocated to this account. 
• Common uses are: 
  • Audit Fees 
  • Insurances, general, workers compensation 
  • Payroll not yet paid, such as the last week’s of the period 
  • Provision for outstanding Annual Leave, Long Service Leave (over 5 years) 

Please contact us to discuss this article further or you need any help with your church’s financial management processes at [email protected] or 1300 138 627 

 

© Benkorp Management Services Pty Ltd 2018