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Why Bother With Accruals?

accrual-calendar-graphicToday’s blog is on one of my favorite topics—accruals. Oh, no; I lied.

Let’s face it—accruals are rarely anyone’s favorite topic. As an engineer, I tend to look at accruals as an accounting exercise that really doesn’t add anything to the energy management picture, so why would anyone even bother?

The short answer is that for those in accounting departments and those dealing with budgets and Profit & Loss (P&L) statements, accruals are very important and very necessary. But there are also some tangible benefits on the energy management side.

So what is an accrual? An accrual is basically a gap-filling estimate that is necessary in order to complete an accounting period. The problem is that when we get to the end of the accounting period we have a gap between the meter read date (that marks the end date of utility billing period) and the calendar date (that marks the end of the accounting period). We can’t control when our utility vendors read the meters. Typically utility companies read meters based upon a meter-reading route that’s based upon certain zones or certain districts. You can’t just typically call a utility company and say “Hey, can you read mine on the 31st instead of on the 13th?” Now with the inroads that smart meters are making, it’s quite possible that in the future, organizations might be able to self-select a meter reading and billing date. But today we’re stuck with whatever our utility vendors do for us. So when we’re getting ready to close out a fiscal accounting period, we find this jagged ending to our utility billing history with unavoidable gaps in the accounting record.

Gaps mean missing data—and missing data means imprecision in planning and budgeting. And that’s where accruals can really be helpful. We most often see accruals being used by for-profit businesses that have very structured fiscal period P&L statements. These are organizations that for various reasons need to produce an accurate P&L statement at the end of every accounting period. There are retail organizations where the store manager’s performance, and in some cases the store manager’s bonus, is based upon the details of the P&L for the end of each financial period.

Well, we know for the entire fiscal period what the rent or lease amount was, and we know what the salary and expenses benefits were, and we know what marketing expenses were. But when the electric bill ended 15 days before the end of the accounting period, and we won’t even see the utility bill that includes that 15 days for another two weeks, we need to find a way to accurately fill in that gap with an expense estimate so that we can complete a reliable P&L statement for the organization.

Some universities care about accruals—especially at the close of a calendar year. And a lot of non-profit types of organizations care because they are on fund accounting. You’ve probably heard the expression “Use it or lose it.” Governmental entities that work on fund accounting need to pay attention to the close date of a funding period. They wouldn’t want to lose unexpended funds on July 1st just because a utility bill wasn’t going to be received until July 14th (including 15 days from June). They would like to set aside the necessary funds to pay 15 days of June’s electric bills so they can spend it when the bill comes in. Not all organizations do this, but some do, and more might want to.

There’s another reason to do accruals. They can be used to more accurately track budget vs. actual expenses, or actual vs. projected energy use.

At EnergyCAP, we understand the value of accruals. And that’s why our EnergyCAP software provides two different ways to accrue end-of-period utility expenses, with options to help with a third. But that’s a topic for another blog.

If you’d like more information about accruals, watch the recording of our recent Energy Leader Webinar on the topic of Accruals. Have a great day!