Accounts Payable and Accrued Expenses (2)
A second similar situation arises when the government writes checks prior to its year-end and reduces the book balance of its cash below zero. It can do this because it knows that all of the written checks will take some time to clear the bank, at which time the government expects that the actual balance in its bank account—its bank balance—will be sufficient to clear the checks. The difference between this case and the first situation is that, in this case the government does not physically hold onto the checks. It mails them. In this case, the government would not report a negative balance for cash on its statement of net assets. Rather, it would bring the book balance of the account up to zero and would add the same amount to its accounts payable balance. Effectively, this reclassifies the negative book balance of cash to accounts payable.
Accrued expenses represent liabilities for goods and services received by a government for which either an invoice has not been received or the entire invoice does not apply to the fiscal year-end being reported. A simple example should make this clear.
Practical Example Referring to the $1,000 stationery purchase example used above, let us say that the government did not receive the invoice for the stationery until July 7. Assuming that the physical delivery of the stationery still occurred on or before June 30, the organization would record an accrued expense for this purchase. Basically, a liability is recorded for the accrued expenses and, at the same time, stationery expense is charged. Also keep in mind that amounts might have to be estimated for shipping or similar charges in establishing the accrued expense. Conversely, the government may take into consideration discounts for prompt payment that it intends to take, if it is the organization’s normal practice to take advantage of such discounts.
Accrued expenses also arise because invoice amounts or service periods span the end of the fiscal year of an organization. For example, if a monthly telephone bill covers a period that ends on the 15th of each month, the government should accrue a telephone expense for that portion of the July 15 telephone bill that applies to the fiscal year ending on June 30, which would be for the period from June 16 (first day of the bill period) through June 30.
A similar accrued expense concept applies to salary expenses where the pay period does not coincide with the end of a fiscal year. Only the portion of the weekly or biweekly salary expense (including related fringe benefit expenses) that is earned by employees up to and including the date of the fiscal year-end should be accrued as salary (and fringe benefit) expense through the end of the government’s fiscal year-end.
Taken From : Governmental Accounting Made Easy