Estimated accrual

What it means

An estimated accrual captures a cost or revenue that belongs to the closing period although no document has arrived. Typical cases are December energy use, goods delivered but not yet invoiced, or a rebate whose exact amount only the supplier knows.

It differs from accruals and deferrals in certainty: there both amount and period are known, here the amount is estimated. It differs from a provision because the performance has already happened - only the paperwork is missing.

Estimated items come on both sides. A liability estimate captures an obligation not yet invoiced, such as a service received; an asset estimate captures a claim of uncertain amount, such as a supplier bonus or an insurance payout the insurer has not yet quantified. In the balance sheet they therefore appear among both assets and liabilities.

How it works in practice

The estimate has to be supported: last year’s consumption, a contract rate, an order, a delivery note. The support is filed with the closing, because in an inspection or an audit it is what defends the accrual.

In the next period the item is released and replaced by the actual invoice. The difference between estimate and fact is posted currently, not as a correction of the prior year.

Before closing the books we send the client a short list of questions: which December services have not been invoiced yet, whether goods arrived without an invoice, and which utility statements are still awaited. From the answers we build the estimated items and attach the calculation behind them to the year-end file.

What to watch out for

Skipping accruals is the commonest reason December looks cheaper than every other month while January costs jump. The result is wrong in both years, and so is the tax base.

An estimated item is booked without VAT, and input VAT can only be deducted on the strength of an invoice, not an estimate. Anyone who puts the tax into the estimate or deducts it in advance ends up with a mismatch between the books and the VAT return that is hard to explain in an inspection.