Structuring accrued revenue and accrued expense heads in COA

Find out interesting insights with John Silverstein, VP of FP&A, XR Extreme Reach

Moderated by Sherry, Digital Transformation Consultant at Hyperbots

Don’t want to watch a video? Read the interview transcript below.

Sherry: Hello and welcome to all our viewers on CFO Insights. I’m Sherry, a financial technology consultant at Hyperbots, and I’m very excited to have John Silverstein here with me today. John is a seasoned finance executive with over two decades of experience in leadership roles, working with both Fortune 500 companies and high-growth startups. Thanks so much for joining us, John!

John: Thanks for having me, Sherry. I’m excited to be here.

Sherry: We’re here to talk about structuring accrued revenue and accrued expense accounts in the chart of accounts, understanding common mistakes, and best practices, and how AI can help streamline these processes. Let’s dive right in. John, why is it so important for organizations to properly structure accrued revenue and expenses in their chart of accounts?

John: That’s a great question, Sherry. Proper structuring of accrued revenue and expense accounts is crucial for accurate financial reporting, compliance with accounting standards, and effective decision-making. When these accounts are set up correctly, they provide clear visibility into outstanding revenues and expenses, ensuring that financial statements accurately reflect the organization’s financial position.

Sherry: I see. So, it’s not just about accuracy, but also about supporting strategic planning and cash flow management, right?

John: Exactly. Proper structuring helps with cash flow management, forecasting, and strategic planning. It allows finance teams to have a clear view of what’s coming in and going out, even if it hasn’t been billed or paid yet.

Sherry: That makes a lot of sense. In your opinion, should accrued revenue and expense accounts mirror their respective revenue and expense parts of the chart of accounts? Why or why not?

John: In many cases, yes, it’s beneficial to have accrued revenue and expense accounts mirror their respective revenue and expense parts. This creates a 1-to-1 correspondence, which makes it easier to do things like ratio analysis. When the accounts align, tracking and reporting are simpler, and it’s easier to reconcile because everything ties directly.

Sherry: But I imagine that there’s a balance to strike, right? You don’t want too much granularity in the accounts?

John: Absolutely. The level of granularity should match the organization’s reporting needs. You don’t want to get too granular because, in a typical month-end close, there’s only so much you can focus on. If it’s too detailed, it can be inefficient. Less granularity can often be more effective for the analysis you need.

Sherry: Got it. What are some common mistakes you’ve observed accountants make when setting up accrued revenue and expense accounts?

John: One big mistake I’ve seen is not aligning these accounts properly. For instance, if you don’t break out the accrued revenue and expenses at the right level, it becomes difficult to perform margin analysis or other key financial analyses. Another issue is getting too detailed, which can lead to misclassification or even overwhelm the team with too much data.

Sherry: So it’s about finding that sweet spot’s detailed enough to be useful, but not so detailed that it becomes unmanageable.  

John: Exactly. Also, failing to regularly update and reconcile the accrued accounts is a common pitfall. Timing issues between revenue and expenses can lead to discrepancies, which can snowball into bigger problems.

Sherry: Could you give our viewers an example of how different industries handle accrued revenue and expense accounts?

John: Sure! In manufacturing, for example, accrued revenue might include income from goods that have been shipped but not invoiced yet. Accrued expenses could include wages or utilities that haven’t been billed. In healthcare, accrued revenue often consists of services rendered but not yet billed, while accrued expenses might include medical supplies or contract labor. In SaaS companies, accrued revenue typically involves a subscription service that’s been delivered but not yet invoiced, or it could be prepaid and recognized over time.

Sherry: That’s helpful to understand how it differs by industry. Moving on to best practices, what would you say are the key guidelines for structuring accrued revenue and expense accounts in the chart of accounts?

John: The key is to align the structure of your accounts with both business needs and industry standards. That way, you can make useful comparisons and support decision-making. You also want to balance granularities providing enough detail for meaningful insights without making the accounts overly complex.  

Sherry: And how important is regular reconciliation in this process? Can AI help with that?

John: Regular reconciliation is essential for maintaining accuracy. Without it, you risk having unreconciled items pile up, leading to errors and timing mismatches. AI can enhance this process by automating the matching of accrued items with invoices and highlighting discrepancies. It can speed up the process and reduce manual intervention, which not only saves time but also minimizes errors.

Sherry: That sounds like a huge benefit! Can you share an example where AI helped a company streamline its accrued revenue or expense management?

John: Sure! I worked with a retail company that implemented an AI tool to manage accrued expenses, like utilities and rent. The AI tool automatically categorized and matched the expenses to the correct accrued accounts detected anomalies, and suggested adjustments in real time. This resulted in a 30% reduction in reconciliation time and a significant decrease in errors, which improved the overall accuracy of their financial statements.

Sherry: That’s impressive! What final advice would you give to organizations looking to improve their handling of accrued revenue and expense accounts?

John: My advice would be to regularly review and update the chart of accounts to ensure it aligns with the business’s evolving needs. As business models and pricing structures change, so should the chart of accounts. Also, consider leveraging AI tools to automate and optimize the management of accrued accounts, from classification to reconciliation. And finally, maintain a balance between granularity and usability to ensure that your accounts provide the insights you need for effective decision-making.

Sherry: That’s excellent advice. Thank you so much, John, for joining us today and sharing your insights on structuring accrued revenue and expense accounts. I’m sure our viewers will find your guidance invaluable.

John: Thanks, Sherry! It was a pleasure.

What to read next