Cash vs Accruals Accounting
  • 30 Aug 2020
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Cash vs Accruals Accounting

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Accounting Methodology

Overview

Mambu supports two main accounting methodologies – Cash and Accruals based accounting - which you can choose between based on your internal operations.

The key difference between the two methodologies is the moment when income or expenses are recognized on the General Ledger.

While cash accounting recognizes incomes or expenses only when a payment is made or received, accruals recognizes them at the moment they accrue for the organization, regardless of whether a cash transaction occurs or not.

Please Note
You can select the methodology for each of your products independently.

Under Administration > Products > Actions > Edit > Accounting Rules, select Cash or Accrual from the drop-down menu next to Methodology.

Accounting Rules - Methodology drop-down with None, Cash, Accrual options

Please Note
If None is selected above, Accounting will be disabled for this loan product. This means that transactions belonging to this specific product will not appear in Journal Entries.
Additional Reading

Cash-Based Accounting

With this methodology, income is recognized when cash is received (that is, when a client actually pays a bill or interest) and an expense when cash is paid (that is, when the organization pays a bill, not when the bill is received).

Example: On May 1, 2010, Company A borrowed $100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June:

Journal entry on May 1, 2010

Debit Credit
Loan Portfolio 100,000
Cash 100,000

Payment received on June 30, 2010

Debit Credit
Cash 102,000
Loan Portfolio 100,000
Interest from Loan Portfolio 2,000

Accrual-Based Accounting

Under accrual accounting, income and expenses are recognized when they are accrued, not when the money is actually exchanged.

Income

Income is recognized when both of the following conditions are met:

  1. Income is earned: products are delivered or services are provided.
  2. Income is realized (cash is received) or realizable (it is reasonable to expect that cash will be received in the future).

Expenses

Expenses are recognized in the period when they occur, and not only when paid.

Example: On May 1, 2010, Company A borrowed $100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June:

Journal entry on May 1, 2010

Debit Credit
Loan Portfolio 100,000
Cash 100,000

Interest posted to account on May 31, 2010

Debit Credit
Interest Receivable 1,000
Interest Income 1,000

( $100,000 x 12% x 1/12 = $1,000 for this  month )

Interest posted to account on June 30, 2010

Debit Credit
Interest Receivable 1,000
Interest Income 1,000

( $100,000 x 12% x 1/12 = $1,000 for this  month )

Payment received on June 30, 2010

Debit Credit
Cash 102,000
Loan Portfolio 100,000
Interest Receivable 2,000

Sources:


Interest Accrued Method in Accounting

You can choose between Daily and Monthly Interest accrual methods to determine when the interest accrued is booked for your loan product.

Please Be Aware

This feature is not enabled by default. If you would like it enabled for your organization, please contact your Customer Success Manager.

Under Administration > Products > Actions > Edit > Accounting Rules, select Daily or Monthly from the drop-down menu next to Interest Accrued Method.

If None is selected here, interest is not accrued on this loan product.

Interest Accrual Method in Accounting with Daily and Monthly options.

Tor Monthly accrual, the total accrued interest will be booked on the last day of every month at 23:59:59 (the time of the organization).

For Daily accrual, it will be posted daily at 00:00:00 (the time of the organisation) for the previous day.

Every time the accrued interest is booked, the previous monthly journal entries will be reversed and the new ones with the current interest accrued will be logged.


Interest Accrued Method Transition

If the method is changed on an active product (for instance, the method is changed from Monthly to Daily in the middle of the month) the journal entries will be reversed, to be in accordance with the newly selected method.

The same applies when transitioning from Daily to Monthly – on the next End of Day Process execution, the daily journal entries will be reversed, adding monthly entries at the end of the month instead.

Interest Accrual Calculation in Accounting

Please Note

This functionality has been developed for loan products only.

By default, interest accrual is posted daily/monthly as an aggregated amount per loan product (a sum of all interest accruals of each loan account of a specific product).

If you would like interest accrual posted per loan account, follow the steps in this section.

Please Be Aware

This feature is not enabled by default. If you would like it enabled for your organization, please contact your Customer Success Manager.

Under Administration > Products > Actions > Edit > Accounting Rules, select Breakdown per Account from the drop-down menu next to Interest Accrual Calculation, then click Save Product on the bottom right.

Interest Accrual Calculation in Accounting

After this step, a new tab will appear under Accounting called Interest Accrual Breakdown.

Interest Accrual Breakdown tab under Accounting

The Parent ID of the breakdown entries corresponds to the Entry ID of the aggregated amounts under the Journal Entries tab.

Parent ID under Interest Accrual Breakdown corresponds to Entry ID under Journal Entries

Entry ID under Journal Entries corresponds to Parent ID under Interest Accrual Breakdown

You can change the Interest Acrrual Calculation setting at any time, even when the product is in use. If you no longer wish to have accrual reports on the account level, simply change Breakdown per Account back to Aggregated Amount under Administration > Products > Actions > Edit > Accounting Rules, select Breakdown per Account > Interest Accrual Calculation.


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