Cash vs Accruals Accounting

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Overview

Mambu supports the two main accounting methodologies - Cash and Accruals based accounting- which you can choose based on your internal operations.

The difference between both is the moment when income or expenses are recognized on the General Ledger.

While cash accounting recognizes incomes or expenses only when a payment is made or received, accruals recognizes those at the moment they accrue for the organization, regardless if a cash transaction occurs or not.

You can select the methodology for each of your products independently.

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Cash

With this methodology, income is recognized when cash is received, e.g. when a client actually pays a bill or interest, and an expense when cash is paid, e.g. when the organization pays a bill, not when the bill is received.

Example: On May 1, 2010, Company A borrowed $100,000 from our MFI and pays 12% interest at the end of June:

[Journal entry on May 1, 2010]

	Debit	Credit
Loan Portfolio	100,000
Cash		100,000

[Payment received on June 30, 2010]

	Debit	Credit
Cash	102,000
Loan Portfolio		100,000
Interest from Loan Portfolio		2,000

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Accruals

Under the accrual accounting, incomes and expenses are recognized when they are accrued, not when the money is actually exchanged.

Income is then recognized when both the following conditions are met:

Income is earned.
Income is realized or realizable.

Income is earned when products are delivered or services are provided.

Realized means cash is received.

Realizable means it is reasonable to expect that cash will be received in the future.

Expenses are recognized in the period when they occur and not only when paid.

Example: On May 1, 2010, Company A borrowed $100,000 from our MFI and promised to pay 12% interest at the end of June:

[Journal entry on May 1, 2010]

	Debit	Credit
Loan Portfolio	100,000
Cash		100,000

[Interest posted to account on May 31, 2010]

	Debit	Credit
Interest Receivable	1,000
Interest Income		1,000

( $100,000 x 12% x 1/12 = $1,000 for this month )

[Interest posted to account on June 30, 2010]

	Debit	Credit
Interest Receivable	1,000
Interest Income		1,000

( $100,000 x 12% x 1/12 = $1,000 for this month )

[Payment received on June 30, 2010]

	Debit	Credit
Cash	102,000
Loan Portfolio		100,000
Interest Receivable		2,000

[Sources: http://accountinginfo.com/study/accrual-101.htm, http://en.wikipedia.org/wiki/Comparison_of_cash_and_accrual_methods_of_accounting]

Interest Accrual in Accounting

For Accruals methodology you can choose between Daily and Monthly Interest accrual methods.

The total accrued interest will be booked on the last day of every month for Monthly accrual, and for Daily accrual they will be posted daily at 23:59:59, the time of the organisation.

At the end of the following month, the previous monthly journal entries will be reversed and the new ones with the current interest accrued will be logged.

Method Transition

If the method is changed on an active product, for example mid-month the method is changed from Monthly to Daily, the journal entries will be reversed, to be in accordance with the newly selected method. The same applies when transitioning from Daily to Monthly, on the next End of Day Process execution, the daily journal entries will be reversed, adding instead monthly entries at the end of the month.

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