Accrual Accounting and ERPNext

Author : Hari Madhavan

Accrual Accounting offers a structured approach to address the challenges of uneven revenue and expense recognition. By implementing accrual accounting principles with ERPNext, we have achieved better alignment of income and expenses on a monthly basis. Here’s an overview:

Transition to Accrual Accounting

• Challenges with Cash Basis Accounting:
• • Revenue was recognised when invoices were raised, leading to timing mismatches:
    • Time & Material (T&M) Projects: Delays in time-sheet approvals caused revenue from work done in one month to be recognised in subsequent months.
    • Milestone-Based Projects: Revenue was recognised only upon achieving milestones, even though progress occurred continuously.
    • Advance Invoices & AMCs: Revenue was recognised upfront for services yet to be delivered, creating distortions.
• Accrual Accounting Adjustments:
  • Deferred Revenue: Advances (e.g., AMCs) are treated as liabilities and recognised as income proportionally over time or based on actual work completed.
  • Provisions for Work Done: For T&M and milestone projects, revenue for completed but un-invoiced work is provisioned monthly and reversed at the start of the next month.
  • Deferred Expenses: Annual expenses like insurance are spread proportionally across months.
• Benefits:
  • Improved matching of income and expenses at company, team, and project levels.
  • Reduced monthly P&L fluctuations.

Role of ERPNext in Implementation

• Key Features Leveraged:
  • Deferred Revenue/Expense Handling: Invoices can be flagged as deferred transactions, with options to distribute income/expenses over time.
  • Automated Journal Entry Reversals: Simplifies the reversal of month-end provisions at the start of the next month.
• Streamlined Review Process:
  • Initially, reviews were conducted manually using General Ledger reports.
  • Insights in ERPNext enabled tracking provisions and deferred revenue by project, significantly speeding up reviews

ERPNext’s powerful accounting features and Frappe Insight’s flexibility, has helped us to cleanly address revenue recognition challanges while enhancing financial transparency and control.

Next Steps

• The accounts team is currently performing checks manually during the transition phase.
• Plans are underway to automate these checks and integrate them into a notification system for enhanced efficiency.