AP Accruals and Reversals Month End: Avoid Costly Audit Surprises

Key takeaways

AP accruals record expenses incurred but not yet invoiced, ensuring a true and fair view under Indian GAAP, and preventing profit distortions across periods.
Separate AP accruals, provisions, and GRNI in your close checklist, these have different recognition bases, approvals, and audit procedures.
Use purchase orders, service contracts, meter readings, project milestones, and GSTR 2B comparisons to estimate unbilled costs, document everything.
Auto reverse accruals on day one of the next period, then match invoices on receipt, analyze variances, and refine estimates monthly.
Apply GST, TDS, MSME, and foreign exchange rules correctly, claim ITC only on actual invoices, but deduct TDS at accrual.
Build controls around materiality, maker checker approvals, vendor reconciliations, and related party scrutiny, maintain complete audit trails.
Automation, for example AI Accountant, can suggest accruals, auto reverse, match invoices, and generate audit ready schedules.

AP Accruals India: the practical month end guide

Picture this, it is March 30, and you are staring at a mountain of unbilled expenses. The internet invoice is missing, the software consultant wrapped up work, but no bill yet, and the electricity board is late again. That is the reality AP teams face in India during year end.

AP accruals India means expenses incurred but not billed, recorded so your statements show a true and fair view. Without them, March profits look inflated, then crash in April when bills arrive. In India, the stakes include GST compliance, MSME disclosures, and a compressed reporting calendar. For a refresher on the principles, see accrual-basis accounting and the accrual concept in accounting.

Good accruals are not guesswork, they are documented estimates backed by contracts, receipts, meters, milestones, and subsequent events.

AP Accruals vs Provisions vs GRNI: Understanding Indian GAAP distinctions

AP accruals arise when goods or services have been received, amounts are reasonably estimable, but invoices are pending. These sit within trade payables, often disclosed as unbilled dues if material, aligned with guidance in ICAI materials.

Provisions under Ind AS 37 or AS 29 cover liabilities with uncertainty in timing or amount, for example warranties or legal claims. While both involve estimates, provisions carry higher uncertainty and call for different disclosures and judgments.

GRNI handles inventory scenarios, when materials are received but supplier invoices are pending. For services, use AP accruals, not GRNI. For more on process mechanics, see accrued accounts payable and accrued expenses vs accounts payable.

Why the distinction matters: different approvals, reversals, audit testing, and financial statement presentation. Keep these buckets clearly separated in your month end checklist.

The Close Process at a Glance: Month end and March year end

Cut off windows: lock the period at March 31 for recognition, then use April 7 to 10 for subsequent events review to catch late invoices relating to March.
Source documents: POs, GRNs, service confirmations, contracts, meter readings, and vendor emails are your foundation.
Subsequent events review: scan mailboxes and e-invoicing portals early in April to anchor estimates with actuals where possible.
Vendor statement reconciliation: identify unrecorded liabilities and MSME dues needing disclosure and interest computation.
Related party scrutiny: ensure all intercompany and KMP related expenses are accrued and disclosed.
Close calendar: bake in time for accrual estimation, maker checker review, and sign off, rushing creates misstatements.

Tip: Align your close with ICAI guidance and document judgments, auditors will focus on completeness, cut off, and the reasonableness of estimates.

How to Estimate Unbilled Costs

Purchase orders: use PO rates and quantities adjusted for GRN variances to estimate goods related accruals.
Service contracts: compute accruals exactly per contract cadence, for example monthly SaaS, AMC, professional retainers.
Utility consumption: apply meter readings and tariff slabs, billing may land mid month, but consumption is known.
Project milestones: accrue percent complete by March 31, less advances, retain completion evidence.
Run rate: for recurring services without formal contracts, use monthly run rate validated by past invoices.
GSTR 2B vs purchase register analysis: investigate gaps, separate timing differences from missing accruals.
GST: recognize expense excluding ITC, claim ITC only when the vendor invoice is received, see accrual concept in accounting.
TDS: deduct and accrue TDS at the time of expense accrual for services.
Foreign currency: use RBI reference rate on March 31 for year end, book exchange differences on settlement.
Documentation: maintain working papers, calculations, approvals, and subsequent events tie backs, auditors will request these.

Examples: accrue March rent per lease, compute bandwidth charges from plan plus overage, check cloud portals for auto renewals. For added perspective, review accrued accounts payable and accrued expenses vs accounts payable.

Journal Entries and Policy to Reverse Next Period

Basic entries:

Service accrual
Dr Professional Fees 75,000
Cr Accrued Expenses 75,000

Goods received not invoiced
Dr Raw Materials 2,50,000
Cr GRNI 2,50,000

Auto reversals: reverse on day one of the next month to avoid double counting, then record the invoice at actuals.

Reversal example
Dr Accrued Expenses 75,000
Cr Professional Fees 75,000

Straddling periods: if the invoice arrives in May, re accrue in April to keep expenses in the correct period.

Variances: differences between accrual and invoice flow through current period P&L, investigate material variances and refine estimation. For background, see accrual concept in accounting and ICAI materials.

GST and FX: do not claim ITC on accrual, record ITC when the invoice is posted, use the accrual date exchange rate, take differences to exchange fluctuation.

Matching Process: How to Match to Bills on Receipt

Two way matching: compare PO to invoice for rate, quantity, terms, and taxes.
Three way matching: PO, GRN, and invoice must agree, resolve variances with documentation.
Service invoices: rely on completion certificates, timesheets, and contract milestones.
Clearing accruals: an accurate estimate will net to minimal expense impact post reversal.
Price or quantity variances: post differences to current period expense and document reasons.
Tax matching: verify GST rate, place of supply, IGST versus CGST plus SGST, and TDS applicability.
Delays: if accrual reversed in April but invoice lands in June, re accrue for April and May.
Foreign currency: match using settlement date rate, differences go to exchange fluctuation.

Example: Accrued March internet 50,000, April invoice 52,500 including late fee, book 52,500, the 2,500 variance hits April expense.

Controls: Approval and Materiality Thresholds

Materiality: set practical thresholds by entity size and vendor significance, for example 10,000, 50,000, or 1,00,000.
Vendor specific: tighter thresholds for top vendors and MSME suppliers.
Approval workflows: route per hierarchy and segregation of duties, see approval workflows.
Maker checker: preparer posts, reviewer approves, especially for larger accruals.
Evidence retention: keep POs, GRNs, confirmations, contract extracts, and working papers.
Exception handling: define special approvals for related parties, FX, and unusual items.
Cut off schedule: list potential accrual categories and billing cycles, review monthly.
Variance analysis: compare estimates to actuals, recalibrate methods where bias exists.

Audit Readiness: Disclosure Requirements for Audit

Schedule III presentation: show trade payables with unbilled dues where material.
Ageing: include accrued amounts in current buckets, explain long outstanding balances.
MSME disclosures: identify MSME accruals, compute interest, present in notes.
Related parties: disclose accrued amounts with group entities and KMP.
Vendor confirmations: ask vendors to confirm both billed and unbilled services or deliveries.
Roll forward: reconcile opening, additions, matches, reversals, and closing balances.
Basis of estimates: document assumptions, contracts, consumption data, and milestones.
GST cross checks: ensure no ITC claimed on mere accruals in GSTR 3B.
Management representation: support completeness assertions with your accrual files.

Common Pitfalls and How to Avoid Them

Double counting: reversal failures plus invoice posting inflate expenses, monitor reversals and exceptions.
Premature ITC: never claim ITC on accruals, only on invoices.
Missing TDS: deduct TDS at accrual for services, not at invoice receipt.
Advance confusion: do not accrue services already covered by vendor advances, reconcile advances monthly.
Capex versus opex: classify correctly, upgrade projects are capex, maintenance is opex.
Ignoring duties and freight: accrue all landing costs for goods.
MSME identification: tag MSME vendors for disclosure and interest computation.
FX rate errors: use RBI reference on reporting date, track revaluations.
Weak documentation: incomplete papers slow audits and block variance learning.
Inconsistent thresholds: apply materiality consistently to avoid wasted effort and missed items.

How AI Accountant Can Help with AP Accruals

Estimate unbilled costs: the engine analyzes POs, GRNs, contracts, and historic patterns to suggest accruals, it flags recurring expenses automatically.

Reverse next period: configure auto reversals by category, exceptions can be managed manually, the system tracks reversals not matched to invoices for follow up.

Match to bills on receipt: smart matching compares vendor, amount, description, and timing, variances are flagged for review, minor deltas post automatically with explanations.

Controls and approvals: materiality based routing, segregation of duties, and full audit trails help enforce policy consistently.

Audit ready reporting: roll forwards, ageing with accrued amounts, MSME summaries, related party listings, and variance dashboards export to common working paper formats.

Indian compliance: separation of expense accruals from ITC, TDS provisions on service accruals, and Schedule III friendly outputs, integrations to Tally and Zoho Books streamline statutory books.

Outcome: fewer misses, faster close, stronger controls, and better audit conversations, while finance focuses on judgment rather than data wrangling.

Practical Cheat Sheets and Templates

Month end AP accrual checklist:

Scan utilities, rent, professional services, software, AMC, freight, government fees.
Verify cut off, GRNs to period end, service confirmations, meter readings, subsequent events through the review date.
Validate calculations, PO and contract references, GST or TDS, FX rates, quantity and rate checks.
Obtain approvals, department head sign off, finance review, materiality checks, MSME flags, exceptions documented.
Confirm system entries, correct accounts and tax codes, vendor codes, period assignment, reversal set up.

Accrual estimation worksheet:

Vendor, description, period, basis, base amount, GST, TDS, net accrual, document reference, approver.
MSME, related party, foreign currency, and materiality indicators.

AP accrual policy template:

Scope, objectives, and thresholds by category.
Roles and responsibilities, maker checker, timelines.
Routine procedures, exceptions, reversals, variance analysis.
Controls, approval matrix, documentation, audit trails.
Compliance for GST, TDS, MSME, and related parties.

Sample journal entries:

Service accruals, Dr Professional Fees, Cr Accrued Expenses, plus TDS provision.
GRNI, Dr Raw Materials, Cr GRNI.
Utilities, Dr Electricity or Water, Cr Utilities Payable.
Reversal entries, Dr Accrued Expenses, Cr Expense.
FX accruals, Dr Expense in INR, Cr Foreign Currency Creditors, document RBI rate.

Variance analysis template:

By vendor and category, track estimate, actual, variance, reason, and corrective action.

Audit prep checklist:

Accrual roll forward, vendor ageing with unbilled dues, MSME and related party schedules, basis of estimates files.

Frequently Asked Questions

Can we book GST Input Tax Credit on accrued expenses without receiving vendor invoices?

No, ITC requires a valid tax invoice. Accrue the expense, but claim ITC only when the invoice is posted. This separation is critical for GST compliance and audit readiness.

How should a CA determine foreign exchange rates for March end accruals from overseas vendors?

Use the RBI reference rate on March 31 for conversion, recognize exchange differences on settlement. For monthly closes, use the month end RBI rate and keep documentation in the working papers.

Under Schedule III, should accrued expenses sit in trade payables or other current liabilities?

Most accrued expenses for normal purchases and services belong in trade payables, disclose unbilled dues separately if material. Use other current liabilities only for items outside ordinary trade activity.

How do I handle MSME disclosure for unbilled dues during year end close?

Tag MSME vendors in the accrual register, compute interest under the MSME Act for delayed payments, and disclose dues and interest in notes. Ensure vendor classification evidence is retained for audit.

What is the best practice when the actual invoice significantly differs from the accrual estimate?

Record the invoice at actual, let the variance hit current period P&L, analyze the root cause, and update estimation logic. Material variances should be reviewed by management with documented reasons.

Which account heads should I use for different accruals to keep the GL clean?

Use clear and consistent heads such as Accrued Expenses, Unbilled Services, GRNI, Utilities Payable, and Professional Fees Payable. Map reversals and matching to the same heads to simplify reconciliations.

How is TDS applied on service accruals when invoices are not yet received?

Deduct and accrue TDS at the time of expense recognition, not on invoice receipt. Post a separate TDS liability entry with the accrual and reconcile when the invoice arrives.

What documentation must I keep to satisfy statutory audit for AP accruals?

Maintain estimation worksheets, POs, GRNs, contracts, emails, meter readings, approval trails, subsequent events tie backs, and a roll forward reconciliation. This evidence supports completeness and cut off assertions.

How frequently should a finance team recalibrate accrual estimation methods?

Perform monthly variance reviews and an annual deep dive. Adjust for recurring biases by vendor or category, update thresholds, and train preparers and reviewers on revised rules.

Can automation improve month end accuracy and speed for accruals in Indian entities?

Yes, tools like AI Accountant can propose accruals from PO or GRN data, auto reverse on day one, match invoices on receipt, and produce MSME, related party, and roll forward reports, all aligned to GST and TDS rules.

How should a CA treat annual contracts billed quarterly, while services accrue monthly?

Accrue monthly based on the contract, reverse on day one of next month, then allocate the quarterly invoice across the relevant months when received, matching to the underlying monthly accruals.

What controls are essential to prevent double counting when reversals fail but invoices are posted?

Implement exception reports for unreversed accruals, maker checker approvals for journals, and automated reversal jobs with monitoring. AI Accountant can track reversal status and highlight unmatched items for action.