Accrual Accounting in SAP

The acronym SAP can be used to refer to two different terms as it relates to accounting. SAP refers to a unique set of accounting rules for insurance companies, known as statutory accounting principles (SAP), or an accounting solution enterprise software, known as Systems, Applications, and Products.

Accrual Accounting

Accrual accounting is one of the two major types of accounting methods used for the recognition of revenue and expenses for financial statements. Unlike the cash basis of accounting, the accrual method does not recognize revenue or expenses when cash flows in and out of a business; rather, revenue is recognized whenever a sale or transaction occurs regardless of when payment is made. Expenses are recorded whenever the corresponding revenue is recognized.

Statutory Accounting Principles

Statutory Accounting Principles (SAP) are set forth by the National Association of Insurance Commissioners (NAIC) to regulate the accounting practices of insurance companies. Insurers who operate in the United States must prepare and issue special financial statements for review by state insurance departments. The SAP guidelines help highlight information related to capital and surplus for solvency purposes. The surplus is needed to ensure that insurance companies can pay out any claims for underwritten policies. SAP is considered more restricting than the generally accepted accounting principles (GAAP).

SAP has much of the same accrual accounting rules as GAAP; all GAAP rules are reviewed by the NAIC and can either be adopted, modified, or rejected in the statutory accounting system. Information regarding any GAAP rule decisions for SAP are explained in detail through the various statements of statutory accounting principles (SAP).

Systems, Applications, and Products in Data Processing

Systems, Applications, and Products, or SAP, is a German-based enterprise software company that offers an accounting solution product to meet the accounting needs of businesses. Taken in its entirety, SAP is one of the largest independent software providers in the world, although its accounting package forms just one small part of its overall revenue stream.

Highly systematized and customizable, accrual accounting with SAP software can be tailored to fit specific business needs using the company's manual accrual engine. This engine can incorporate different financial accounting standards simultaneously and effectively differentiates between accruals and deferrals. Any deferrals automatically roll over into the next fiscal period and are posted into prepaid expenses per accrual accounting guidelines.

Like many accounting software programs, the SAP system relies on data input in multiple fields within predetermined accounting "paths," or sets of financial statements for which the data can be drawn from automatically. Users have to input data such as date of transaction, accounts, post keys, type of transaction and any possible reversals or discounts.

Accrual accounting is detailed in the GAAP and has been regulated by the Internal Revenue Service (IRS), which means that accrual systems are widely similar regardless of the entity or system performing the accounting.

The Bottom Line

Accrual accounting is a type of accounting that records revenues and expenses as they occur, as opposed to when money is actually received or paid. Accrual accounting practices are noted in the process of preparing financial statements for insurance companies, which are created under the statutory accounting principles (SAP). The Systems, Applications, and Products software allows for different accounting solutions to be generated when preparing financial statements.