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

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.

By adopting accrual accounting with ERPNext’s robust features, the company has successfully addressed revenue recognition challenges while enhancing financial transparency and control