As required by the Financial Accounting Standards Board, Emerson College follows the accrual basis of accounting, meaning that revenues and expenses are recorded as the services are rendered or goods are received. This is different from the cash basis of accounting, whereby revenue and expenses are recorded when cash is received or sent. The biggest difference between the two methods of accounting are shown in the definitions below.
Prepaid Expense—A prepaid expense is an advance payment of a good or service to be received in the future. These advance payments are considered assets, rather than expenses, until the goods or services are received. A common example of this is a rent payment made at the end of one month for the following month’s rent. For example, if Department A pays for services in May which will be delivered in July, a prepaid expense exists as of June 30th. Additionally, a prepaid expense can represent only a portion of an amount paid. For example, if Department B pays in March for services to be rendered from April 1st through September 30th, then as of June 30th, half of the amount paid in March representing the July-September portion would be considered a prepaid expense as the services for that period have not been rendered as of June 30th.
Accrued Expense—An accrued expense results from the receipt of a good or service where an invoice has not yet been received. The accrued expense is considered a liability as a benefit has been received and the entity is aware that a future payment will need to be made. For example, if Department A purchases food for a catered event on June 29th and does not receive a bill until July 3rd, the amount should be recorded as an accrued expense as of June 30th as the economic benefit of the purchase has been received by that date. Similar to prepaid expenses, accrued expenses can also represent only a portion of a service received. For example, Department B receives services from April 1st through September 30th for which it will be invoiced at the conclusion of the services. As of June 30th, half of the services representing the April-June portion would be considered an accrued expense as the services for that period have been rendered as of June 30th.
Departments are encouraged to monitor their prepaid and accrued expenses. Prepaid and accrued expense balances as of June 30th need to be communicated to the Controller’s Office as part of year-end closing procedures. Refer to the year-end closing process memorandum for further details.