Accounting terms

Dictionary of all accounting terms

What is Accrual?

An accrual allows a business to record expenses or revenues now for a later time when it will spend money or receive cash.

This type of accounting is useful for putting into your books today what you will spend or receive at a later date. It is therefore different from the cash basis of accounting, which allows you to only put down today for cash that you have received or spent today.

There are two types of accruals that are commonly used:

Revenue accrual

This allows the business to record an accrual in the current period, so that the company's income statement will show the amount in the current period, even though the business has not invoiced the client yet.

An example of revenue accrual is related to electric companies. The amount of electricity (and labor) for March won't be billed until the beginning of April. However, to accurately reflect revenues for March, the entries need to be adjusted to show the revenues the electric company has actually earned (though not received) in March.

Expense accrual

This allows a company to put down an expense in the current period, even though the expense has not occurred yet.

An example of expense accrual can be bonuses that employees earned for 2016, even though the company won't pay them out until 2017. In order to accurately reflect the liability for 2016, entries are adjusted to record this expense accrual.

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