Home > Accounting > Annual financial statements: accruals and deferrals simply explained

Annual financial statements: accruals and deferrals simply explained

Updated on March 07, 2022

What are accruals and deferrals and why are they formed?

According to the Swiss Code of Obligations, Swiss companies are obliged to book income and expenses in the financial year in which they are actually incurred. This is the only way to provide a true and fair view of the company's financial position and results of operations, and to make it possible to compare different financial years. However, since there are also expenses and income that relate to several years, for example, or are paid in arrears in the next year for the previous year, certain accrual postings must be made as part of the annual financial statements. There are two types:

1. prepaid expenses.

The creation of prepaid expenses, also called transitory assets, involves the representation of income not yet received for the year to be closed or expenses paid for the following year. Examples are invoices not yet issued, rent paid in advance and subscription or membership fees for the new year.

For example, if an expense has already been paid for the following year, the entry "Prepaid expenses to expense" reduces the expense in the current year. 2.

2. accrued expenses and deferred income

Accrued expenses and deferred income, also known as prepaid expenses, are formed to represent expenses not yet paid for the year to be closed or income already received for the following year. Examples include revenues from subscription models, interest income and rental income received in advance.

For example, if income has already been received for the following year, the entry "Income and deferred income" reduces the income in the current year.


When can accruals be waived?

The creation of accruals and deferrals is, as already mentioned, very important for various reasons and must be applied continuously in every annual financial statement. However, accruals can be waived for continuously accruing benefits (such as BVG or social security contributions) if:

1. there is no close connection between expenses and income

2. the amount of the benefits is not subject to significant fluctuations

3. it is ensured that, viewed over the course of the year, the benefits for an entire year are recorded for each accounting period.


Do you book accruals with or without VAT?

1. companies not subject to VAT

If the company is not subject to VAT, all items can be accrued gross.

2. companies with effective VAT accounting

If companies settle using the effective method, they must record both their prepaid expenses and deferred income on a net basis (i.e. without VAT).

3. companies with balance tax method

For companies that use the balance tax rate method of accounting, things are a bit more complicated. Since no input tax may be deducted with this accounting method, all expenses must be entered gross (i.e. with VAT). For expenses with purchase tax, the amount paid must be accrued at 107.7%, since the purchase tax must be paid in addition to the expense.

Revenues, on the other hand, must be booked net. From the gross invoice amount issued, the balance tax must be deducted, as in this example:

Invoice amount issued (incl. 7.7% VAT): CHF 10'000.

Balance tax rate 5%: - (0.05 * 10'000) = - CHF 500.-

Deferred amount: CHF 9'500.-


What happens to the accruals in the new year?

In the case of a normal business year starting on 01 January, the accruals are booked as per 31 December. In the new year, they are reversed as of 01 January by reversing the posting records.

Example: In the case of an accrual for an expense that has already been paid, the posting reduced the expense in the old fiscal year. By reversing the posting record "Expense to prepaid expenses", the accrual is reversed and at the same time the expense is posted in the new year where it belongs.

Oliver Diggelmann

Do you have questions? Get in touch with me, I am happy to help.

Follow us