Cash vs Accruals Accounting

Accounting methodologies

Mambu supports two main accounting methodologies you can choose from based on your internal operations:

• Cash
• Accruals based accounting

The key difference between the two methodologies is the moment when income or expenses are recognized in the General Ledger (GL).

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

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

To set the accounting methodology:

1. On the main menu, go to Administration > Products.
2. Find the product for which you want to set the accounting methodology and, on the right-hand side of the row, select Actions > Edit.
3. In the Accounting Rules section, select Cash or Accrual from the drop-down menu next to Methodology. If you select None, accounting will be disabled for this loan product. This means that transactions belonging to this specific product will not appear in journal entries.
4. If you select Accrual, the Interest Accrued Method option will be revealed. For more information, see Interest accrued method in accounting below.
5. Save the product.

Cash-based accounting

With this methodology, income is recognised when cash is received that is, when a client actually pays a bill or interest and an expense is recognised 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 USD100,000 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

Payment received on June 30, 2010

Accrual-based accounting

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

Income

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

• Income is earned: products are delivered or services are provided.
• Income is realised (cash is received) or realisable (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 they are paid.

Example: On May 1, 2010, Company A borrowed USD100,000 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

Interest posted to account on May 31, 2010

Interest posted to account on June 30, 2010

Payment received on June 30, 2010

Interest accrual methods in accounting

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

To set the interest accrual method:

1. On the main menu, go to Administration > Products.
2. Find the product for which you want to set the interest accrued method and, on the right-hand side of the row, select Actions > Edit.
3. In the Accounting Rules section, select Accrual from the drop-down menu next to Methodology.
4. Next to Interest Accrued Method, select Daily or Monthly from the drop-down. If you select None, interest will not be accrued on this loan product.
5. Save the product.

For 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, the accrued interest will be posted daily at 00:00:00, the time of the organization, for the previous day. However, if you want the accrued interest for the current day to be posted at 23:59:59 on the current day, please get in touch with your Mambu Customer Success Manager and ask them to enable the daily accrual on the same day or Interest accrual posted in current day feature, which is in Early Access.

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 accrual calculation in accounting

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

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

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.

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

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

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.