Accruals for small businesses in Sweden
Accrual is a fundamental accounting principle crucial for small businesses. This page introduces the concept of accruals, their purpose, and significance for small businesses, especially under the K2 framework.
What are Accruals?
Accrual involves distributing revenues and costs over the periods they belong to, instead of when the transaction actually occurs. This ensures that the financial statements reflect a true picture of the company’s financial performance.
Examples of Accrual
If you invoice consulting hours for December in January, this revenue should be accrued to December despite the invoice date being in January.
If you in December pay an invoice for rent for January, this cost should be accrued to January.
Why are Accruals Important for Small Businesses?
Correct accrual ensures the company’s financial statements and profit are accurate, which is crucial for both internal management and compliance with tax legislation. For instance, for a small consulting firm, it would have a significant impact if all work in December was not included in the annual financial statements.
Accrual according to the K2 framework
In the K2 framework, used by most smaller businesses, accruals are normally not done for amounts less than SEK 5,000. This simplifies the accounting process for small businesses.
Common questions about accruals
Yes, accruals must be made if the amount exceeds SEK 5,000, or if there are many transactions that together constitute a significant amount.
Costs and revenues are normally accrued according to the periods they pertain to. If you lease a car for three years, you accrue the agreement over three years. Rent for January is accrued to January. Consulting hours for December are accrued to December. An insurance premium for July 2024 to June 2025 is accrued 50% to 2024 and 50% to 2025 if the fiscal year is January-December. Etc.
If the amount to be accrued is not certain before you need to close an accounting period, you need to make as accurate an estimate as possible. However, the principle of prudence applies, so all assessments need to be conservative. If you have applied for a grant of SEK 500,000 but it is highly uncertain whether you will receive it, you cannot accrue (at least the entire) amount before a decision of the grant giver has been made.
This depends on the structure of the grant. If a grant, for example, covers 100% of the actual costs in a project, you cannot recognize revenue in financial statements for an amount greater than the project’s costs for that fiscal year. So, if the project’s costs for 2024 are SEK 350,000, then SEK 350,000 in revenue for grants should be accrued to 2024.
If the grant covers 50% of the project’s costs, then you must calculate and accrue revenues corresponding to this. For example, if the project’s cost for the fiscal year is SEK 200,000, then SEK 100,000 in revenues should be accrued to that year and the remaining amount balanced to be recognized in income over the coming fiscal years, provided the costs are incurred.
The principle of prudence also applies here, so, if the grant has clear requirements for what must be delivered to retain the grant, you cannot recognize a larger part of the grant than what the grantor is likely to approve at an eventual final review.
Understanding and correctly applying accruals is crucial for the financial health and success of small businesses. By following these principles, companies can maintain accurate and reliable financial statements.