# Cash vs Accruals Accounting Source: https://docs.mambu.com/docs/cash-vs-accruals-accounting ## Accounting methodologies Mambu supports two main accounting methodologies you can choose from based on your internal operations: * Cash * Accruals based accounting The key difference between the two methodologies is the moment when income or expenses are recognized in the General Ledger (GL). You can select the methodology for each of your products independently. While cash accounting recognizes incomes or expenses only when a payment is made or received, accruals accounting recognizes them at the moment they accrue for the organization, regardless of whether a cash transaction occurs or not. To set the accounting methodology: 1. On the main menu, go to **Administration** > **Products**. 2. Find the product for which you want to set the accounting methodology and, on the right-hand side of the row, select **Actions** > **Edit**. 3. In the **Accounting Rules** section, select **Cash** or **Accrual** from the drop-down menu next to **Methodology**. If you select **None**, accounting will be disabled for this loan product. This means that transactions belonging to this specific product will not appear in journal entries. 4. If you select **Accrual**, the **Interest Accrued Method** option will be revealed. For more information, see [Interest accrued method in accounting](#interest-accrual-calculation-in-accounting) below. 5. Save the product. ![Accounting Rules - Methodology drop-down with None, Cash, and Accrual options](@site/static/img/support/accounting--accounting-rules-methodology-selection.png) ### Cash-based accounting With this methodology, **income** is recognised when cash is received that is, when a client actually pays a bill or interest and an **expense** is recognised when cash is paid, that is, when the organization pays a bill, not when the bill is received. **Example:** On May 1, 2010, Company A borrowed USD100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June: **Journal entry on May 1, 2010** | | Debit | Credit | | -------------- | ------- | ------- | | Loan Portfolio | 100,000 | | | Cash | | 100,000 | **Payment received on June 30, 2010** | | Debit | Credit | | ---------------------------- | ------- | ------- | | Cash | 102,000 | | | Loan Portfolio | | 100,000 | | Interest from Loan Portfolio | | 2,000 | ### Accrual-based accounting Under accrual accounting, income and expenses are recognised when they are accrued, not when the money is actually exchanged. #### Income Income is recognized when **both** of the following conditions are met: * Income is **earned**: products are delivered or services are provided. * Income is **realised** (cash is received) or **realisable** (it is reasonable to expect that cash will be received in the future). #### Expenses Expenses are recognized in the period when they occur, and not only when they are paid. **Example:** On May 1, 2010, Company A borrowed USD100,000 from our institution with a 12% yearly interest rate and pays off the loan in full at the end of June: **Journal entry on May 1, 2010** | | Debit | Credit | | -------------- | ------- | ------- | | Loan Portfolio | 100,000 | | | Cash | | 100,000 | **Interest posted to account on May 31, 2010** | | Debit | Credit | | ------------------------------------------------------ | ----- | ------ | | Interest Receivable | 1,000 | | | Interest Income | | 1,000 | | ( USD100,000 x 12% x 1/12 = USD1,000 for this month ) | | | **Interest posted to account on June 30, 2010** | | Debit | Credit | | ------------------------------------------------------ | ----- | ------ | | Interest Receivable | 1,000 | | | Interest Income | | 1,000 | | ( USD100,000 x 12% x 1/12 = USD1,000 for this month ) | | | **Payment received on June 30, 2010** | | Debit | Credit | | ------------------- | ------- | ------- | | Cash | 102,000 | | | Loan Portfolio | | 100,000 | | Interest Receivable | | 2,000 | ## Interest accrual methods in accounting You can choose between **Daily** and **Monthly** interest accrual methods to determine when the interest accrued is booked for your loan product. To set the interest accrual method: 1. On the main menu, go to **Administration** > **Products**. 2. Find the product for which you want to set the interest accrued method and, on the right-hand side of the row, select **Actions** > **Edit**. 3. In the **Accounting Rules** section, select **Accrual** from the drop-down menu next to **Methodology**. 4. Next to **Interest Accrued Method**, select **Daily** or **Monthly** from the drop-down. If you select **None**, interest will not be accrued on this loan product. 5. Save the product. ![Interest Accrual Method in Accounting with Daily and Monthly options.](@site/static/img/support/interest-accrued-method-accounting.png) For **Monthly** accrual, the total accrued interest will be booked on the last day of every month at 23:59:59 (the time of the organization). For **Daily** accrual, the accrued interest will be posted daily at 00:00:00, the time of the organization, for the previous day. However, if you want the accrued interest for the current day to be posted at 23:59:59 on the current day, please get in touch with your Mambu Customer Success Manager and ask them to enable the daily accrual on the same day or **Interest accrual posted in current day** feature, which is in Early Access. By default, interest accrual is posted daily or monthly as an aggregated amount per loan/ deposit product and per branch. An option to post interest accrual per account (in addition to the aggregated amount) is available for loan products only. Every time the accrued interest is booked, the previous monthly journal entries will be reversed and the new ones with the current interest accrued will be logged. :::note If the method is changed on an active product from **Monthly** to **Daily** in the middle of the month, the journal entries will be reversed, to be in accordance with the newly selected method. The same applies when transitioning from **Daily** to **Monthly**: on the next End of Day Process execution, the daily journal entries will be reversed, adding monthly entries at the end of the month instead. ::: ## Interest accrual calculation in accounting :::note This functionality has been developed for **loan products** only. ::: By default, interest accrual is posted daily or monthly as an aggregated amount per loan product, meaning the sum of all interest accruals of each loan account of a specific product. If you would like interest accrual to be posted per loan account, follow the steps in this section. Under **Administration** > **Products** > **Actions** > **Edit** > **Accounting Rules**, select **Breakdown per Account** from the drop-down menu next to **Interest Accrual Calculation**, then click **Save Product** on the bottom right. ![Interest Accrual Calculation in Accounting](@site/static/img/support/interest-accrual-calculation-accounting.png) After this step, a new tab will appear under **Accounting** called **Interest Accrual Breakdown**. ![Interest Accrual Breakdown tab under Accounting](@site/static/img/support/interest-accrual-breakdown-accounting.png) The **Parent ID** of the breakdown entries corresponds to the **Entry ID** of the aggregated amounts under the **Journal Entries** tab. ![Parent ID under Interest Accrual Breakdown corresponds to Entry ID under Journal Entries](@site/static/img/support/parent-id-interest-accrual-breakdown-accounting.png) ![Entry ID under Journal Entries corresponds to Parent ID under Interest Accrual Breakdown](@site/static/img/support/parent-id-entry-id-journal-entries-accounting.png) You can change the **Interest Acrrual Calculation** setting at any time, even when the product is in use. If you no longer wish to have accrual reports on the account level, simply change **Breakdown per Account** back to **Aggregated Amount** under **Administration** > **Products** > **Actions** > **Edit** > **Accounting Rules**, select **Breakdown per Account** > **Interest Accrual Calculation**.