Accrual Accounting- Techno functional Spec
- Vishwas Babu A J
Accrual Accounting Requirements
Scope of Type 2 Accrual accounting
We would support the following support for Accrual Accounting (Will refer to the same as Type 2 Accrual Accounting)
- Accrue interest, fees and penalties as soon as they become due (on the due date of the repayment)
- Add the ability to accrue interest at any point in time (it might not be possible to do so in the first cut of accrual accounting since we do not have support for true “declining balance”, it might be beneficial to think of these two items together)
Existing functionality (Type 1 Accrual accounting)
We currently have (limited, not tested or updated since the first time we wrote the functionality back in June last year) support for Upfront Accrual (let’s call it Type 1 to avoid confusion).
- Accrue the entire interest upfront (as soon as the loan is disbursed)
- Accrue a fee as soon as it is applied
Ensuring that Type 1 works correctly should be fairly trivial (as most of the code is in place). However the focus of this documentation is adding support for Type 2 Accrual Accounting.
Modifications to COA Snippet
New accounts for capturing Receivables would be required
Account Type | Placeholder (Suggested Account Name) | Comments |
|---|---|---|
Assets | Cash |
|
Loan Portfolio |
| |
Transfers in Suspense |
| |
Receivables Interest | Newly added for recognizing interest | |
Receivables Fees | Newly added for recognizing fees | |
Receivables Penalties | Newly added for recognizing penalties | |
Income
| Interest on loans |
|
Income from fees |
| |
Income from Penalties |
| |
Expenses | Losses Written Off |
|
Liability | Loan Over-payments |
|
New Posting rules
The base posting rules would be as follows
Event | Account to Debit | Account to Credit |
|---|---|---|
Disbursal | Loan Portfolio (A) | Cash (A) |
Interest Applied | Receivables Interest (A) | Interest on loans (I) |
Fee Applied | Receivables fee (A) | Income from fees (I) |
Penalty Applied | Receivables penalties (A) | Income from Penalties (A) |
Principal repayment | Cash (A) | Loan Portfolio (A) |
Interest repayment | Cash (A) | Receivables Interest (A) |
Principal Write off | Losses Written Off (E) | Loan Portfolio (A) |
Fees payment | Cash (A) | Receivables fee (A) |
Penalty payment | Cash (A) | Receivables penalties (A) |
Interest write off | Losses Written Off (E) | Receivables Interest (A) |
Fee write off | Losses Written Off (E) | Receivables fee (A) |
Penalty write off | Losses Written Off (E) | Receivables penalties (A) |
Examples
Basic Scenario
Consider This Example on a Loan with a Monthly Payment Schedule.
Event | Sequence No | Transaction Date (dd/mm/yyyy) | Effective Date (for accounting) | Comment | Debit | Credit |
|---|---|---|---|---|---|---|
Disbursal
| 1 | 7-10-2013 | 7-10-2013 | Loan Portfolio (A) | Cash (A) | |
Automated System Accrual Event | 2 | 7-11-2013
| 7-11-2013 | A Repayment is Accrued/Recognized on the day it becomes due (both Interest and Fees/Penalties associated with the Repayment shall now be accrued). The system event shall only kick in when it finds a repayment which is due for that particular day. In this scenario, it would only recognize the first repayment for this loan which is due on the 7th of November 2013. The Accrual event does not kick in if
| Receivable Interest (A) | Income from interest (I) |
Receivable Fees (A) | Income from fees (I) | |||||
Receivable Penalties (A) | Income from penalties (I) | |||||
1st Installments repayment | 3 | 7-11-2013 | 7-11-2013 | Pays Principal, interest, fees and Penalties associated with this repayment | Cash (A) | Receivable Interest (A) |
Receivable Fees (A) | ||||||
| Receivable Penalties (A) | ||||||
| Loan Portfolio (A) | ||||||
| Prepayment for remaining Installments | 4 | 8-11-2013 | 8-11-2013 | None of remaining Repayments are due yet, so the Interest/Fees/Penalties associated with them have not yet been recognized. However, we use the same posting rules for repayments (and let accruals happen independently as per schedule) | Cash (A) | Receivable Interest (A) |
Receivable Fees (A) | ||||||
| Receivable Penalties (A) | ||||||
| Loan Portfolio (A) | ||||||
| Delete Previous Prepayment (with sequence Number 4) | 5 | 9-11-2013 | 8-11-2013 | In case of deletion of a transaction, all accounting entries made for that transaction needs to be reversed. For deleting (or even editing) an existing transaction, accounting books for that day should not be closed | Receivable Interest (A) | Cash (A) |
| Receivable Fees (A) | ||||||
| Receivable Penalties (A) | ||||||
| Loan Portfolio (A) | ||||||
| Automated System Accrual Event | 6 | 7-12-2013 | 7-12-2013 | Identical to event 2 but recognizes the receivables for the second repayment which has become due today | ||
| Out of turn repayment (as of 6-11-2013) | 7 | 7-12-2013 | 6-11-2013 | One of the USP's of MifosX which Organizations have found very convenient had been its Flexibility like the ability to make a repayment as on any date provided, edit any repayment at any point in time, undo a disbursal etc ( of course we can also disable such behavior by closing accounting as on a particular day). Handling out of turn payments becomes easy with the approach for "delinking" accruals and repayments. So an "Out of turn" repayment here would do the following 1) Not affect any accruals 2) Cause the platform to inspect all repayments made after the effective date of this out of turn repayment. If this repayment causes the allocation (allotment of the paid amount in a repayment towards principal, interest and fees) of any of the following repayments to change, the repayments are automatically reversed at the portfolio side ( accounting reversals are also made for the reversed transactions). New repayments having the same repayment date and amount (but different allocation) are then created for the reversed repayments. The new repayments are also accounted appropriately | Receivable Interest (A) | |
| Receivable Fees (A) | ||||||
| Receivable Penalties (A) | ||||||
| Loan Portfolio (A) | ||||||
| Write Off the rest off the Loan | 8 | 8-12-2013 | 8-12-2013 | Unlike Cash based accounting which is affected only by Principal Write-off. Accrual Based accounts should respond to the following
We should not allow a write-off before the last payment. Also, after the writeoff, we stop accruing interest/fees and Penalties
| Losses Written Off (E) | Receivables Interest (A) |
| Receivable Fees (A) | ||||||
| Receivable Penalties (A) | ||||||
| Loan Portfolio (A) | ||||||
| Undo Disbursal | 8 ( in a Parallel Universe) | 8-12-2013 | 8-12-2013 | Undoing the disbursal does the following 1) Reverses all payments for this loan (and creates subsequent accounting reversals) 2) Reverses all accruals which have happened on this loan (and creates subsequent accounting reversals) | ||