ACCOUNTING PRINCIPLES AND STANDARDS HANDBOOK

# CHAPTER 4. ACCRUAL ACCOUNTING

# Section 1.0 General

This chapter sets forth basic principles, requirements, and techniques
for Commerce accounting on an accrual basis, whereby financial
transactions are recorded in the period of occurrence, even though the
related cash is disbursed or received during another period. Use of the
accrual method provides Commerce management with financial data related
to performance so that informed decisions may be made.

The accrual method of accounting recognizes the significance and
accountable aspects of financial transactions, events, or allocations as
they occur. Costs are recognized in the accounts when incurred and
revenues are recognized when they are earned. The basis of constructive
receipt of goods and services is used without waiting for physical
delivery to, or acceptance by, the Government.

# Section 2.0 Authority

The authority that governs accrual accounting is [31 U.S.C. Sec. 3512
(e).](http://www4.law.cornell.edu/uscode/31/3512.html)

# Section 3.0 Frequency of Accruals

Accruals will be computed and recorded in the accounting system for each
accounting period, which is generally monthly. When expenditure data is
not available, e.g. foreign payments made by the State Department,
monthly estimates should be recorded in the accounting system and
sequentially adjusted when actual expenditures are available.

# 

# Section 4.0 Documentation

Documents reflecting computation and support for accruals and analysis
of accuracy of accruals shall be retained for reference and audit.

# Section 5.0 General Guidelines

> .01 [Prepayments]{.underline}
>
> Prepayments and advances to employees, contractors, grantees, and
> others should not be reported as expenditures until performance
> occurs. In the meantime, advances and prepayments should be recorded
> and reported as assets. Such asset accounts should be reduced, in
> whole or in part, as the expenditures are incurred and reported.

.02 [Progress Towards Completion]{.underline}

> The measure of accrued expenditures under contracts for work to the
> Government\'s specifications is the amount of work performed during
> the period, not the amount of any progress payments, which may be
> made.

.03 [1. Accrued Liabilities]{.underline}

> a\. In addition to recording as accounts payable the liability for
> services rendered and goods received, as evidenced by vendors\'
> invoices or other documents, it is necessary for management purposes
> to record the assets, expenses, and liabilities for goods and services
> received and performance rendered for which no bills have been
> received or payments made at the end of the month. Such accruals may
> be estimated on the basis of available information and previous
> experience.
>
> b\. When a contractor builds facilities or manufactures goods or
> equipment to the Government\'s specification, the liability to pay for
> work is incurred as it is performed by the contractors rather than
> when deliveries are made.
>
> [2. Accrued Accounts Receivables, Unearned/Deferred Revenue, Accrued
> Revenue]{.underline}
>
> It is necessary for management purposes to record the accrued accounts
> receivable, unearned/deferred revenue, and accrued revenue for goods
> and services and performance rendered to others for which a) no bills
> have been submitted or payments received at the end of the quarter, or
> for amounts due at the time of the event that gives rise to a claim.
> (Accrued Accounts Receivable/Accrued Revenue); and b) payments were
> received, but the goods and services and performance have not yet been
> rendered (Unearned/Deferred Revenue). Such accruals may be estimated
> on the basis of available information and previous experience.
> Receivables shall be reversed (liquidated) when they are collected or
> converted into other resources or determined to be uncollectible in
> whole or in part. Unearned/Deferred Revenue shall be reversed
> (liquidated) when the goods and services and performance have been
> rendered, and recorded as Earned Revenue and the payments collected
> applied against Accounts Receivable for that Earned Revenue. See
> [FASAB Statement
> 1](http://www.fasab.gov/pdffiles/codification_report2007.pdf) (SFFAS
> No. 1).

.04 [Standards for Estimating Accruals]{.underline}

> In the absence of invoices or other available data, reasonable
> estimates shall be used to accrue the cost of goods or services
> received before the end of a reporting period. Some of the ways to
> record accrued expenditures are as follows:
>
> a\. Receiving reports showing quantities received and determining
> whether a given shipment is complete or partial are useful in
> determining the amount of the accrual when the invoice has not been
> received.
>
> b\. Payroll, travel, and other vouchers received or prepared but not
> yet paid.
>
> c\. Obligation figures may be the best estimate of the amount of the
> expenditure incurred where an obligation is recorded covering the
> expenditure, which accrued within an accounting period.
>
> d\. Prior month actual accrual or a trend of several previous months
> may be used when estimating a current month accrual.
>
> e\. Quarterly performance reports from grantees should be used to
> accrue expenditures for grants.
>
> f\. Estimates should be obtained from project managers or other
> operating officials who are familiar with progress under the contract
> or grant if reports from contractors or grantees are not available or
> are not feasible.
>
> g\. Sampling and other statistical methods may be used to make
> estimates in cases where dollar amounts are relatively low but the
> number of transactions is high. The method used and the reasons for
> its selection should be documented and kept on file.

.05 [Effect on Accounting System]{.underline}

> The accounting system will provide the means to reconcile accrued
> expenditures to obligations and outlays.