My company uses the accrual basis of accounting. Before joining this company, I had always used the cash basis. My question is: when entering invoices, should I use the invoice date as stated on the invoice, or the last day of the service period covered by the invoice? We do have some bills that are prepaid in nature, such as mobile phone charges; but other bills, such as electricity and internet, are only received after actual usage. I have always entered them by invoice date, while noting the covered period. Which approach is correct?

Core principles of the accrual basis

The accrual basis requires revenue and expenses to be recognized in the period in which the rights or obligations occur, rather than when cash is received or paid. For expenses, this means that expenses should be attributed to the accounting period in which they are actually benefited, not the date the invoice is issued or paid. Therefore, using only the invoice date as the basis for entry may lead to incorrect expense attribution in cases of cross-period bills, such as when the service period spans two accounting periods.

Handling prepaid bills

For prepaid bills, such as mobile phone charges, the service period is typically in the future. In this case, recording the entire expense in the month of payment violates the matching principle. The correct approach is to allocate the expense to the periods in which the benefit is actually received. For example, if a phone bill covers the 1st to the 30th of the next month, the expense should be recognized in the following month, not in the month the invoice is issued.

Handling postpaid bills

For postpaid bills, such as electricity or internet, the service has already been consumed, but the bill is received after the period ends. In this case, the expense should be recorded in the period in which the service was actually used. For example, if an electricity bill covers the 1st to the 30th of the previous month, the expense should be recognized in that month, even if the invoice is issued or received in the current month.

Practical advice: use the service period as the primary basis, with the invoice date as secondary

Based on the above principles, the following approach is recommended:

  • Determine the accrual date:Use the last day of the service period covered by the invoice as the accrual date for expense recognition. This aligns with the accrual basis of accounting.
  • Retain the invoice date:Also record the invoice issuance date in the system as supplementary information for the voucher, facilitating reconciliation and audit trails.
  • Note the period:Clearly indicate the start and end dates of the service in the description or notes field to avoid confusion.

Your previous practice of entering by invoice date and noting the period, while preserving key information, may lead to misalignment of expense periods in financial reports. It is recommended to adjust to accruing based on the service period, and to check at period-end for any unrecorded cross-period expenses.

Note: If the company uses the cash basis, recording by invoice date or payment date is not problematic. However, since the company uses the accrual basis, the principle of expense attribution to the relevant period should be strictly followed.

Conclusion

Under the accrual basis, the correct approach is to use the last day of the service period covered by the invoice as the entry date, rather than the invoice issuance date. For prepaid bills, expenses should be allocated to future periods; for postpaid bills, they should be traced back to the period in which the service occurred. Additionally, retaining the invoice date as a supplementary record aids in internal management and external audits. If your company's accounting policies have special provisions, it is recommended to confirm with the financial supervisor or external auditor before implementation.