Accruals and vendor accounts are two closely related items as it concerns accounting for vendors.

Both accounts are used to record expenditure incurred by the company which are yet to be paid for. However, the major difference between accruing for and booking as payable (in the vendor account) is the billing from the Vendor/Supplier/Contractor. When you accrue, it is because you have not yet received an invoice from the vendor, but the expenditure has been incurred. Once the invoice is obtained, the liability is transferred from accrual to the vendors a/c (trade payable).

Practical example

KPK Limited requested from OPP Ltd to carry out certain major repairs and maintenance on KPK's machines. Based on the negotiated price between the procurement team of KPK Ltd and OPP Plc, the value of this repair (per the purchase order - PO) was N21.5m (out of which VAT was N1.5m). 

On 30 December 2020, the repair work was done. It was checked by KPK Ltd.’s procurement team and a Service Received Note (SRN) was raised to evidence that the service has been adequately received.

Entries to be passed on 30 December:

Dr: Repairs & maintenance N21.5m

Cr: Accrual N21.5m

The above N21.5m would be included as part of the Company's accrual as at year end.

On 6 January 2021, OPP Ltd submitted its invoice to facilitate payment.

Entries required on 6 January 2021:

First reverse the initial accrual (this is because the initial accrual may be different from the invoice):

Dr: Accrual N21.5m

Cr: Repairs & maintenance N21.5

Book the invoice:

Dr: Repairs & maintenance N21.5m

Cr: OPP Ltd a/c (Vendor a/c) N21.5m

What if there was no PO?

Sometimes, determining the value of an accrual may not be based on a PO. Not all transactions with vendors pass through a PO.

In practice, different methods can be used to value or measure an accrual in the absence of a PO. The key point is that the method used must be reasonable and supportable. Examples of such methods are:

1. If it is a routine expenditure, the accountant can make use of prior month’s invoice.

2. The accountant can send a mail to the vendor requesting the expected invoice amount.

3. The accountant can make use of invoice from a similar expenditure.