Why are accruals needed every month?
Accrual adjusting entries are needed monthly only if a company issues monthly financial statements. Two reasons for the monthly accrual adjusting entries are:
- To report the revenues and receivables which were earned during the month, but the transactions had not been recorded in the accounts as of the end of the month, and
- To record the expenses and liabilities which were incurred during the month, but the transactions had not been recorded in the accounts as of the end of the month.
Monthly accrual, deferral, and other adjusting entries must be recorded prior to issuing monthly financial statements in order to comply with the accrual basis of accounting.
Expense must be recorded in the accounting period in which it is incurred. Therefore, accrued expense must be recognized in the accounting period in which it occurs rather than in the following period in which it will be paid.
As expense will be debited to record the accrued expense, a corresponding payable must be created to account for the credit side of the transaction