How to Estimate Accruals for Invoices That Haven't Arrived

Accrue when you incur the cost, not when the invoice arrives. Rank evidence: an invoice received after period end, then PO and receipts, then timesheets or progress, then run-rate. Record the method, reverse the entry next period, and track the difference against the actual invoice.

When Do You Need to Accrue?

Accrual accounting records a cost in the period you incur it, whatever the invoice date. The trigger is the obligation, not the paperwork. That means services performed, or goods received (or shipped, if title passes at shipment).

Goods shipped FOB shipping point and still in transit on March 31 are yours, so accrue them to inventory.

The month-end question: what did we receive this period that nobody has billed yet? The hard part is that the answer sits with people outside finance. Look in these places:

• Goods received against a PO with no matching bill
• Recurring vendors whose usual bill (monthly, quarterly or annual) hasn't arrived
• Contractors and professional firms paid by the hour
• Fixed-fee projects that are partly done
• Budget owners, who answer a short "what did you commit to this month?" email
• Card and expense reports not yet submitted

Send the budget-owner email before month end and chase on day one. The trade-show invoice may be sitting in someone's personal inbox.

Which Estimation Method Should You Use?

Pick the method with the most direct evidence for this period. Ramp's guide makes the same point: a receiving record, timesheet or usage report beats a trailing average (Ramp).

Treat run-rate as a fallback: if a cloud vendor's billing console shows month-to-date usage, use it. And don't accrue legal fees on run-rate. Ask the firm for hours and expenses.

How to Build the Accrual List Step by Step

1. Set a cutoff window. Hold the list open a few business days after period end, so late invoices give you actual amounts.
2. Email budget owners. Ask what they committed to or received this month.
3. Pull open receipts. List POs with goods received and no bill matched. In QuickBooks Online, the receiving record is often a warehouse sheet or a delivery email, so ask operations.
4. Find missing recurring bills. List vendors whose usual cycle (monthly, quarterly or annual) shows no bill this period.
5. Collect hours and usage. Get period figures from contractors and from usage-billed vendors' consoles.
6. Get project status. Ask project owners for percent complete, in writing.
7. Apply your floor. Below your accrual threshold, which sits well below materiality, expense the cost when invoiced. Check each quarter that skipped items don't add up to something material.
8. Check AP before posting. Search AP for the same vendor and invoice, so nothing is both billed and accrued.
9. Book a reversing entry. Document the method and inputs per line, and reverse on day one of the next period.
10. True up and review. Compare to actual invoices and note why any line missed.

Five Vendors, Step by Step

All vendors and figures are sample numbers for illustration, not client data.

Sample Co. closes March. Its sample policy accrues any unbilled item above US$1,000, and five vendors qualify.

Notes on the judgment calls:

• Vendor B (cloud). The three-month average is 3,226.67, rounded to 3,227. The reviewer checked that none of the three months held a one-off charge.
• Vendor D (marketing). The project owner confirmed 40% complete against the milestone plan. Earned to date is US$12,000, and less US$6,000 billed leaves US$6,000 to accrue.
• Vendor E (legal). The invoice arrived inside the cutoff window with March service dates, so no estimate was needed. Either enter the bill in AP dated March, or accrue it and enter the bill in April. Never both.

The entry. Vendor A's packaging is stock, so it goes to inventory.

Set it to reverse on April 1, and check the reversal posted before April bills go in.

The April true-up.

The four testable lines landed US$367 higher, about 1.6% of their accrual. The reversal puts that US$367 into April expense.

Vendor B raised its price in March, and the run-rate missed it. The vendor's billing console showed March usage at the new price. Next month, the reviewer will use the console and keep run-rate as the fallback.

Vendor C billed four hours (4 x US$48 = US$192) missing from its mid-week summary. Next month, the reviewer waits for the final timesheet.

Vendor D's April invoice follows its billing schedule, not March progress. For project accruals, the true-up compares cumulative earned against cumulative billed at each milestone, not against the next invoice.

What to Automate vs Keep With a Person

Automate (draft or calculate):

• Listing POs with receipts and no matched bill
• Finding vendors whose usual billing cycle missed this period
• Matching cutoff-window invoices to service dates
• Searching AP for an invoice before its accrual posts
• Run-rate and timesheet math, and the monthly true-up report

Keep with a person:

• Confirming that goods or services were received
• Deciding when a run-rate is no longer valid after a price or volume change
• Percent complete on projects
• Disputed, one-off or contingent costs
• Approving the entry and setting the floor

For how AI fits the first list without weakening your support file, see How to Use AI for Accruals Without Losing the Audit Trail.

What Will Your Auditor Check?

Your year-end auditor looks at how you built each estimate. In US private-company audits, SAS 143 (AU-C 540) lets the auditor use events up to the report date, such as the April invoices. They can also test how management made the estimate, or develop their own (Texas Society of CPAs).

Canada's revised CAS 540 "mirrors ISA 540 (Revised)" (CPA Canada). The international standard, used in the UK, sets out the same three approaches (IAASB flowchart).

They also run a search for unrecorded liabilities. They review payments and invoices for weeks after period end, looking for costs you missed. Your accrual list, including items you considered and rejected, is the answer to that test.

A buyer's quality-of-earnings team asks the same later. Keep these for each accrual:

• The method and why it fits the cost
• Source documents: PO, receipt, timesheet, project status or invoice
• The calculation, reproducible from those documents
• Preparer and reviewer names, with approval date
• The actual invoice and the true-up difference

FAQ

Should I accrue an invoice that arrives after month end? Yes, if the goods or services were received in the period. Use the actual amount, and either enter the bill in AP dated in the period or accrue it. Never both.

How far back should a run-rate go? Three to six months is common. Remove one-off charges and check for price changes before you average.

What if the vendor won't give me an estimate? Use the strongest internal evidence you have, such as hours worked, receipts or a run-rate. Note the method and true it up later.

Do I need to accrue small invoices? Set an accrual floor well below materiality and expense items under it when billed. Apply it the same way every month, and total the skipped items each quarter.