Accruals in Xero: put a late bill in the month it belongs to

Short answer: an accrual is a cost that belongs to this month but has no bill yet, such as a subcontractor who invoices a week after the job or a utility billed in arrears. Without it, this month’s profit looks too good and next month’s too bad when the bill finally lands. To accrue it in Xero, post a manual journal on the last day of the month that debits the cost account and credits an Accruals liability account, and fill in the journal’s auto-reversing date with the first day of the next month. Xero then cancels the estimate on that date, and when the real bill arrives you enter it as normal. Profit over the two months does not change, and nor does cash: the money leaves the bank when you pay the bill. What changes is that each month shows its own costs.

If the supplier’s invoice is dated in the month the work was done and simply arrives late, you do not need an accrual: enter the bill with its own date and it lands in the right month. An accrual is for work done when the invoice will carry a later date, or has not been written at all. Menu names move between Xero releases; if a label below does not match your screen, search Xero Central for “manual journal auto-reversing”.

What an accrual does to the months

	No accrual	Accrued at month end
Month the work was done	No cost	The cost (your best estimate)
Month the bill arrives	The whole cost	The bill, cancelled by the reversal: nothing extra
Total over the two months	Same	Same
Bank balance	Falls when you pay the bill	Falls when you pay the bill
Balance Sheet at month end	Nothing	An Accruals liability until the reversal

A worked example: a builder’s subcontractor

An Australian renovation business invoices about $60,000 a month (all figures excluding GST) and its usual costs (wages, materials, van, insurance, rent) are about $48,000, so a normal month makes about $12,000. In September it also fits out a bathroom for a customer and invoices them $20,000 on 30 September. The fit-out is done by a subcontractor, who sends their $14,000 invoice, dated 8 October.

With no accrual, the Profit and Loss reads:

Month	Sales	Costs	Net profit
September	$80,000	$48,000	$32,000
October	$60,000	$62,000	-$2,000
Two months	$140,000	$110,000	$30,000

September looks like the best month the business has had, $20,000 above normal, and October looks like a loss. Neither is true. An owner who reads September and takes on a second job at the same price, or who reads October and starts cutting costs, is reacting to the timing of one invoice.

With the $14,000 accrued on 30 September:

Month	Sales	Costs	Net profit
September	$80,000	$62,000	$18,000
October	$60,000	$48,000	$12,000
Two months	$140,000	$110,000	$30,000

Same two months, same $30,000, same cash. Now October shows the normal $12,000, and September shows what the bathroom really added: $6,000 on a $20,000 job, a 30% margin, which is the number that tells the owner whether to take on the next one at that price.

How to set it up in Xero

1. Check you have an Accruals account. In Accounting > Chart of accounts, look for a current liability account called Accruals or Accrued Expenses. If there is not one, add it (type: Current Liability).
2. Post the journal on the last day of the month. Go to Accounting > Manual journals > New journal, dated 30 September. Add two lines: debit Subcontractors $14,000, credit Accruals $14,000, with no GST on either line. Give it a narration such as “Bathroom fit-out, September, bill not yet received”.
3. Fill in the auto-reversing date. Set it to 1 October. Xero then posts the opposite journal on that date by itself (debit Accruals, credit Subcontractors), so October’s Subcontractors line starts at -$14,000.
4. Enter the real bill when it arrives. On 8 October, enter the subcontractor’s bill as normal, coded to Subcontractors with GST. It cancels the -$14,000, so October carries nothing extra for September’s work, and the GST is claimed from the bill, which is the tax invoice.
5. Decide on cash basis. If you also read reports on cash basis, untick Show journal on cash basis reports: on cash basis the cost belongs to the day you pay the bill, not the day the work was done (cash vs accrual in Xero explains the two views).
6. Check it at month end. On the Balance Sheet, Accruals should be $0 after each reversal date, and at a month end it should equal only the bills you have accrued for that month. A balance that sticks around means a journal had no reversing date.

If you do not know the exact amount, use the quote, the purchase order or last month’s bill. When the real bill differs, only the difference lands in the next month, which is usually small enough to ignore.

Three traps

• No reversing date. If you forget it, the cost is counted twice: once in September by the journal and again in October by the bill. Xero cannot add an auto-reversing date to a journal that is already posted, so post a reversing journal yourself dated the first of the next month, or void and re-enter the original.
• A locked month. If your accountant has set a lock date after September, you cannot post a journal into it. Accrue before the lock date, or ask them to post it.
• Small, regular bills. A phone or software bill that arrives a month late every month is in the wrong month every month, but each month carries one, so the comparison barely moves. Accrue the amounts that are large next to a month’s profit (above, $14,000 against a normal $12,000) or that arrive irregularly, and leave the rest.

The opposite case is a prepayment: a bill paid now that covers later months, such as a year of insurance. Prepayments in Xero shows that journal, and the month-end checklist puts both in order with the other checks.

Common questions

What is an accrual in Xero? A cost that belongs to a month but has not been billed yet, entered with a manual journal that debits the cost account and credits an Accruals liability account, usually reversed on the first day of the next month.

How do I accrue a bill in Xero? Post a manual journal on the last day of the month: debit the cost account, credit Accruals, no GST, and set the auto-reversing date to the first of the next month. When the bill arrives, enter it as normal.

Does Xero reverse accruals automatically? Only if you fill in the auto-reversing date on the manual journal when you post it. Xero then posts the reversal on that date by itself. Without the date, nothing reverses.

Does an accrual affect my cash flow? No. The money leaves the bank when you pay the bill. An accrual only moves which month the cost shows in on the Profit and Loss; the bank balance and the cash flow are the same either way.

Does an accrual go on my BAS or VAT return? The journal carries no GST or VAT. The tax is claimed from the supplier’s bill, the tax invoice, in the period it is entered, the same as without an accrual.

What is the difference between accruals and accrual basis? Accrual basis is the way Xero reports profit: income when it is invoiced and costs when they are billed, not when money moves. An accrual is one journal that puts a cost in the right month before its bill exists. Accruals only matter if you read your reports on accrual basis.

Is an accrual the same as a draft bill? No. A draft bill does not show on the Profit and Loss at all. If you have the bill but left it in Draft, approve it with its own date; an accrual is for when there is no bill yet.

Know when a bill is missing before you read the month

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