understanding accrual between fiscal years

Here is an example of how a payroll accrual works:

Let’s say that I make $100 in each paycheck. Each paycheck is for two weeks (10 business days) of work, and my final paycheck is for four days worked in this fiscal year and six days worked in the next fiscal year.  To make it simple, let’s call the fiscal years FY1 and FY2.  So my $100 paycheck should be charged 40%, or $40, to FY1 and 60%, or $60, to FY2.

IMPORTANT: Unfortunately, the Harvard payroll system cannot split charges from one payroll into two different fiscal years. It must choose one fiscal year or the other.

Therefore, in order to reflect appropriate payroll charges in the two different fiscal years, Harvard uses accrual journal entries to correct the allocations.

The process works as follows:

1-      When this payroll is processed, it is charged to FY2.  So, in this case, a $100 payroll charge is posted to the fund in July of FY2. But now we have charged the full amount charged to FY2, which is incorrect.

2-      An accrual journal entry (RETROACTIVE) is then created which charges $40 (4 of 10 business days, or 40%) of the payroll to the fund in June of FY1[1].

3-      A journal entry to reverse this accrual is posted in July of FY21.  This posts a payroll credit of $40 to the fund.  The result is a net charge to July FY2 of $60 – the original payroll charge of $100, offset by this accrual credit of $40.

The end result is $40 is charged to the fund in June; $60 is charged in July; and in total, $100 of payroll is charged to the fund.

From a grant manager perspective, this seems to accomplish nothing. After all, the account is still charged the $100.  But this approach allows the University to meet the accounting requirement that expenses for payroll must be included in the correct fiscal year.

[1] This is possible as at Harvard the accounting month of June is open at the same time as July.  So we are able to post journals to June and July at the same time.

 

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