Ledger accruals/amortization in Microsoft Dynamics 365 Finance and Operations one version

Ledger accruals / amortization in Microsoft Dynamics 365 Finance and Operations one version

Accrual accounting needs expenses to be recognized in the period in which they occur/consumed/received.

If an expense is spread on a time horizon to be consumed then we need to move the part which is not consumed/received in balance sheet and only post the relevant time dependent expenses in profit and loss for the fiscal period.

These expenses are hence called as prepaid expenses and they are carried on balance they are incurred.

The other part of expenses should be taken to profit and loss in the appropriate fiscal period.

 Sharing ledger accrual with key steps and visuals:

1. Let us have a prepaid expense amount paid for a good or service being received via an invoice from a vendor.

e.g. insurance payment for 1 year is received via invoice from a vendor and it needs to be amortized across 12 periods

Amortization is an accounting process under which consumption of an expense is spread over time.

The process of setting up such an amortization schedule is an accrual scheme.

As shown in above figure, we select an account to reflect the prepaid expenses in balance sheet until they are supposed to be taken to Profit and loss.

We also define what the number series for voucher sequence for the amortization voucher would carry.

The accrual basis could defined by

• Calendar
• Fiscal
• Allocation key (for spreading amortization on user defined distribution)

Period frequency covers when to post the amortization voucher, options are

• Yearly
• Monthly (This is taken in our example to spread 12 month prepaid insurance over each month)
• Quarterly
• Half-yearly

Note: Daily is not an out of box option.

Posting of the amortization transaction supports options:

• Day
• Week
• Month
• Quarter

We can also decide whether to post at start of month or middle or end of month/week/quarter.

Usually decided as per finance team preference.

Also one can suggest whether to spread equally in all period or using number of days in a month.

1. We would record vendor invoice for insurance expenses for 1 year period in general journal.
2. Without applying accrual scheme, entire amount would get posted to P&L insurance expense at the date of posting.
3. With accrual scheme applied, only the amount for current period is taken in P&L while other part gets posted to balance sheet.
4. The other part of the expense is not immediately taken to P&L rather spread over time when the actual expense is expected to be incurred.

Below visual shows using accrual scheme at general journal line level function and assigning the scheme and selecting a start date for amortization.

Before posting the voucher, one can see the amortization schedule by clicking on transactions button on accrual screen to see the date when the amoutn would be moved from balance sheet accrual account to profit and loss expense account.

On posting the journal with just this voucher line, it would only post one entry

Showing T accounts for 12 months prepaid insurance expense accrual:

One should use related vouchers feature to see all amortization voucher posted along with the main vendor invccie voucher.

D365FO provides accrual capabilities at general ledger level. This feature would have been so amazing to be provided at sub-ledger level e.g. PO processing and hoping one day it comes.

Happy D365FO