Accrual accounting is the only accepted way of doing accounting. When I say accepted I mean GAAP compliant. It really is the only way to do accounting because accounting is a way of keeping track of where and when money is moving. Cash accounting doesn’t do a very good job of doing that.

In its simplest form accrual accounting means I keep track of expenses when I have incurred the expense, not when I paid the expense. I pay about $60,000 in rent every year. Part of that is pretty regular. I pay $3990 each month. In addition to the base charge I have to pay for any maintenance or repairs that the landlord makes to the property. That expense changes every month. Sometimes it is $150 and other months it is $600. They may decide to pave the parking lot and when they do I know I am going to get a bill for it. I am also responsible for my share of the property taxes. That gets paid twice a year. Lastly I am responsible for my share of property insurance. This is called a triple net lease or NNN. Expenses can vary and the actual payments of expenses are not evenly distributed. Even though I only pay my share of the property insurance once a year I enjoy the benefits of that insurance all year. So the expense should be spread out over the entire year. Since I cannot predict with 100% accuracy what my expenses will be I have decided to accrue $200 a day for rental expense. I will make an adjustment at the end of the year and re-evaluate as to whether I am accruing the right amount or not. I tend to over accrue which is more conservative. I will make one adjustment at the end of the year instead of going back and changing the monthly accruals. December may be a more profitable month because of that, but hopefully my estimates are good and the difference is not material.

I am not paying $200 everyday so I need a separate account to balance the expense. That account could be either an asset or a liability depending on how you want to set it up. You can argue with me, but it really doesn’t matter which. If I pay my rent at the beginning of the month and then use the property I already paid for then the rent expense could be a pre-paid asset. If I pay the rent at the end of the month I am increasing my liability as I use the building before I pay for it. Either way is acceptable. I could have separate categories for property insurance and maintenance, but that level of detail provides me no benefit so all related expenses are going to be kept track of in a single asset account called Pre-paid property payments. The problem with making this decision now is that if I wanted that level of detail later it will be harder to recreate, not impossible. I tend towards simple is better than too much detail.

I am going to offer a note of advise. There is no reason I couldn’t have called the expense account rent and the asset account rent also. But doing that would make it easy for the bookkeeper to make a mistake. I would rather have different account names even if they may be a little awkward in their naming.

Here is what the accounts look like in Quickbooks. 

Now I am going to make an entry for the expense of the day. I am going to just make an entry in the register by double clicking on the Pre-Paid Property Payments register rather than making a general ledger entry.

Remember I said that there are no negative numbers? Well I didn’t enter in a negative number, but because the asset account technically had money taken out without any money being in the account it’s balance is negative. This is supposed to be a pre-paid rent payment so I should have paid rent at the beginning of the month and this number would not be negative. However before I make that July insurance payment the balance could become negative, so don’t get hung up on the negative balance of an asset other than cash and bank accounts. Let’s add the rent payment at the beginning of the month. I am going to pay with my credit card since my Cash account only has $50 in it.

Now the balance is not negative but it will be later as I accrue the expense throughout the month. I am accruing for all future expenses. I like accruing expenses daily so that I can get a quick look as to how the month is looking. It would be misleading if I didn’t accrue the expense. It would look like I was making money all month except the last day when I accrued the rent. Again this is about choosing the level of detail you want. I find it useful to look current month before the month is over to see how we are doing. There is nothing wrong with making these entries once at the end or beginning of the month.

Make the entries in the register is sometimes easier an quicker, but it sometimes confuses me. The headings Decrease and Increase instead of Debit and Credit can sometimes be counter intuitive. Another thing that Quickbooks does is it that it has an entry type. You can see that the previous type was a GENJRN or General Journal and this last type was a DEP or Deposit. I am sure that Quickbooks is trying to be helpful, but this ends up confusing me when for instance I go look in the General Journal for this entry and it isn’t there. Here is the General Journal entry for the expense:

 

With a General Journal Entry you can combine entries but they have to be entered in all on the same day. I will show that after I add another accrual.

The second biggest accrual for me is employee expenses. I like to accrue these on a daily basis also. This is definitely seems like a liability to me as employees work before I pay them. I owe them the money after they work, just like a credit card.

There are a lot of parts to payroll. There is the money I pay employees. There is the money I pay the Federal and State governments and there is workman’s comp insurance. I am sure there are more details I could add, but there are other ways to get the same information. I would never use the accounting to see what I had paid each employee. That information is kept elsewhere. I am only going to have a single liability account called Payroll payable. Remember what I said earlier about being careful with names? If I had an expense called payroll and a liability called payroll, it would be very easy for the bookkeeper to mistakenly mix those up. So I am going to call the expense employee cost and the liability payroll payable. It looks like this.

Now I am going to make a General Journal entry for the Employee cost. I have estimated that my daily cost including taxes and workman’s comp is $110 per employee. I can make adjustments later if I am over or under accruing. For employee expenses I usually make the adjustment once a month. 

That is just the start of accruing and account setups, but we are off to a good start. Based on what I have entered so far let’s look at the two important statements.

It looks like I am losing money. Well with $50 in sales of course we are losing money.

Here is the balance statement. The balance statement is always a snapshot in time for a specific day. The income statement (or Profit and Loss) is over a specified time period.

Finally as promised I am going to show the daily entry of employee and rent costs in the same same General Journal Entry.

Here is the General Journal entry that combines the daily payroll and rent expenses (I know I mixed the terms with the account names) Now I may have bad mouthed Quickbooks a little bit and now I am going to tout its benefits. Since I will do these entries daily I will memorize this. Once memorized I can bring up the memorized function and just change the amounts. You can see the memorize button just next to the big delete button. It will ask for a name. I have two memorized transactions. Sales and Expenses. I could combine the two and in fact I may do that. But that is for a later post as I build all of this out.