Auxiliary Standard Operating Procedures

SUBJECT: Accruing vs. Adjusting Entries--Auxiliary Voucher Use
SOURCE: Auxiliary Accounting, Office of the Treasurer
ASOP NO: 3.0
RATIONALE: To provide guidelines on the use of Accruing, Adjusting, and Recode entries and the Auxiliary Vouchers, which are the source of input into the Kuali Financial System (KFS).

It is critical that auxiliary and service center organizations use the vouchers and entries properly and consistently in order to fairly reflect their financial condition. Reporting auxiliaries and service centers (those earning more than $250,000 in revenue in one fiscal year) are required to record financial transactions on an accrual basis and to enter auxiliary vouchers on a monthly basis. (See ASOP 2.0 for specific details on the definition of a Reporting Auxiliary and Service Center.)

The entries must be recorded to fairly state the income statement and balance sheet, thus satisfying the matching principle1. At the heart of the Accrual Accounting concept is the Matching Principle, which simply dictates that revenues be matched with expenses in the same period whenever reasonably and practically possible to facilitate accurate and meaningful financial reporting. (This is in contrast to Cash basis accounting, where income and expenses are determined as cash is received and disbursed.)

ASOP: Auxiliary and Service Center organizations must properly use the auxiliary voucher to post the necessary accrual, adjustment, and recode entries into the KFS in a timely and consistent manner. Reporting organizations will post entries on a monthly basis in order to maintain proper accrual accounting. (See ASOP 14.0 for specific guidelines on auxiliary voucher timeliness.) The following documents can be used by non-auxiliary accounts as well, to post accruing or adjusting entries.

There are three options on the auxiliary voucher document. They are the accrual, adjustment, and recode.

  1. Accrual entries are entered into the KFS via an auxiliary voucher accrual entry (AVAE). Examples of this type of entry are the accrual of revenues earned but not yet received, or to record expenses incurred but not yet paid. This allows the organization to reflect the amount of revenue or expense incurred in the proper fiscal period and allows the matching of income with expenses. These entries automatically reverse in a subsequent period on a specified future date. The AVAE reversal date defaults to the 15th day of the month following the transaction posting; however, this date can be changed by the document creator if desired.

    Common accrual entries are:
    Accounts Payable
    Accounts Receivable

    An auxiliary has received $300 of supplies that have not been invoiced in Accounts Payable. An accrual entry will ensure that the expense is recorded in the month it was incurred. The entry will reverse in the following month when Accounts Payable processes the invoice and pays for the item.

    Document Create Date: 09/10/2004 (Period 3)
    Entry Posting Date: 08/31/2004 (Period 2)
    Document Reversal Date: 09/15/2004 (Period 3)

    Document Account Object Code Debit Credit
    AVAE 60-xxx-xx 5000--Supplies & Expense $300
    60-xxx-xx 9000--Accounts Payable $300

  2. Adjusting entries are entered into the KFS via an auxiliary voucher adjusting entry (AVAD). Adjusting entries are generally made at the end of a fiscal period. Like the accrual, adjusting entries allow the organization to reflect the amount of revenue or expense incurred in the proper fiscal period and allows the matching of income with expenses. However, unlike an accrual entry, an adjusting entry does not reverse.

    Common adjusting entries are:
    Allowance for Bad Debt (See ASOP 6.0)
    Deferred Income
    Prepaid Expense
    Income/Expense reclassification

    A conference center receives cash for an event that will be held in a future period. To record the receipt of cash and defer the income, the following entry is recorded via the cash receipt document.

    Document Account Object Code Debit Credit
    CR 60-xxx-xx 8000--Cash $45,000  
      60-xxx-xx 9400--Def. Income   $45,000

    When the event occurs, the conference center makes an adjusting entry to recognize income earned. The AVAD will ensure that revenue is recorded in the month it was earned, while also relieving the deferred income liability.

    Document Object Code Debit Credit
    AVAD 9400--Def. Income $45,000  
      1507--Conf Fees   $45,000

  3. Recode entries will be entered into the KFS via the auxiliary voucher recode entry (AVRC). Recode entries are used to record accounting adjustments to a prior period and move the associated cash between the accounts in the current period. (Note: cash cannot be moved between accounts using an AVAD.) The following three transactions occur when an AVRC document is used:

    1. The AVRC document, which posts entries to the prior period, occurs first. It behaves in a similar manner to the accrual (AVAE), in that it reverses.
    2. The next transaction that occurs is the AVRC reversal. The reversal date default is the same as the document create date and may not be changed. (Note: the reversal date on the face of the document is the same as the document create date; however, the reversal is actually posted to the general ledger only after the document receives final approval. Therefore, the general ledger post date may be later than the reversal date appearing on the face of the document.)
    3. Finally, upon reversal of the AVRC a distribution of income/expense (DI) transaction is automatically generated in the current period. The post date of the DI is the same as the reversal date of the AVRC (or the final approval date, whichever is later).

    The overall effect is like that of an adjusting entry (AVAD) between accounts, except that in using the AVRC cash is moved to offset the adjustment.

    It is important to note that a recode entry should not be used when corrections are made within the same account, because there is no need to affect cash. An adjusting entry (AVAD) should be used instead. A recode entry should only be used for reclassifications between accounts when cash must be moved between the two accounts. In cases where the entry should affect the current fiscal period only, the distribution of income and expense (DI) document should be used rather than the auxiliary voucher.

    Example: To correct miscellaneous receipt entered into wrong account.

    In reviewing its Monthly Operating Detail Report, "Residence Hall A" discovers that an erroneous income entry was posted to its account. "Residence Hall B's" account should have received the income instead. The AVRC can be used to move the income to the correct account in the month in which it was earned and subsequently move the cash.

    a. The recode voucher (AVRC) is created by the auxiliary

    Document Create Date:    09/10/2004 (Period 3)
    Entry Posting Date:    08/31/2004 (Period 2)
    Doc. Account Org. Obj. Code Debit Credit
    AVRC 60-xxx-01 Res. Hall A 1800 $100  
      60-xxx-02 Res. Hall B 1800   $100

    b. The recode voucher (AVRC) automatically reverses in the current period.

    Reversal Posting Date: 09/10/2004 (Period 3)
    Doc. Account Org. Obj. Code Debit Credit
    AVRC 60-xxx-02 Res. Hall B 1800 $100  
      60-xxx-01 Res Hall A 1800   $100

    c. A DI is automatically generated by the reversal of the AVRC. The DI moves the cash between the accounts in the current period while offsetting the reversing entry to income.

    Entry Posting Date: 09/10/2004 (Period 3)
    Doc. Account Org. Obj.Code Debit Credit
    DI 60-xxx-02 Res. Hall B 8000 $100  
      60-xxx-01 Res Hall A 8000   $100
      60-xxx-01 Res. Hall A 1800 $100  
      60-xxx-02 Res. Hall B 1800   $100
DEFINITIONS: Distribution of Income/Expense Document (DI) - a document in the KFS that moves income or expense from one account and/or object code to another in the current fiscal period.
CROSS REFERENCE: Auxiliary Voucher Documentation
ASOP 2.0 - Definition of a Reporting Auxiliary and Service Center
ASOP 14.0 - Auxiliary Voucher Timeliness
ASOP 6.0 - Allowance for Bad Debt
RESPONSIBLE ORGANIZATION: Reporting Auxiliary and Service Centers

1 "The matching principle means that revenues generated and expenses incurred in generating those revenues should be reported in the same income statement. Revenues for an accounting period are recognized in accordance with the realization principle. Then the expenses incurred in generating those revenues are determined in accordance with the matching principle. Thus, expenses are reported in the income statement for the accounting period in which the related revenues are recognized." (Intermediate Accounting, by Chasteen, Flaherty, and O'Conner; 1992; McGraw-Hill, Inc.; p.60).