Accruals

Loading the player...

What are 'Accruals'

Accruals are earned revenues and incurred expenses that have an overall impact on an income statement. They also affect the balance sheet, which represents liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liability and future interest expense.

BREAKING DOWN 'Accruals'

The use of accrual accounts has greatly increased the amount of information on accounting statements. Before the use of accruals, accountants only recorded cash transactions on these statements. But cash transactions don't give information about other important business activities, such as revenue based on credit and future liabilities. By recording accruals, a company can measure what it owes looking forward and what cash revenue it expects to receive. It also allows a company to show assets that do not have a cash value, such as goodwill.

Using the accrual method, an accountant makes adjustments for revenue that has been earned but is not yet recorded in the accounts, and expenses that have been incurred but are not yet recorded in the accounts. The accruals must be added via adjusting entries, so that the financial statements report these amounts.

Double-entry

In double-entry bookkeeping, the offset to an accrued expense is an accrued liability account, which appears in the balance sheet. The offset to accrued revenue is an accrued asset account, which also appears in the balance sheet. Therefore, an accrual entry will impact the balance sheet and the income statement.

Examples

An example of an accrual regarding revenue involves an electric utility company. The utility company generated electricity that customers received in December. However, the utility does not bill the electric customers until the following month. To have the proper amounts on the utility's financial statements, there needs to be an adjusting entry to report revenue that was earned in December, which reflects the receivables that the utility has a right to as of December 31. The following month, when the cash is received, the receivables will go down, and cash will increase.

An example of an accrual involving an expense is employee bonuses that were earned in 2015, but will not be paid until 2016. The 2015 financial statements need to reflect the bonus expense and the bonus liability. Therefore, prior to issuing the 2015 financial statements, an adjusting entry records this accrual. The accountant increases an expense and creates a liability. Once paid in the new year, the liability will be eliminated, and the cash will be reduced.

Another expense accrual occurs for interest. For instance, a company with a bond will accrue interest expense. Interest on bonds is typically paid semi-annually, but the interest expense will be recorded as the amount that has accrued as of the date of the financial statement. A corresponding interest liability will be recorded on the balance sheet.

RELATED TERMS
  1. Accrue

    The ability for something to accumulate over time. In finance, ...
  2. Cash Basis

    A major accounting method that recognizes revenues and expenses ...
  3. Cash Accounting

    An accounting method where receipts are recorded during the period ...
  4. Accrued Revenue

    An asset class for goods or services that have been sold or completed ...
  5. Modified Accrual Accounting

    An accounting method commonly used by government agencies that ...
  6. Accrued Interest

    1. A term used to describe an accrual accounting method when ...
Related Articles
  1. Investing

    What does Accrual Mean?

    In accrual-based accounting, transactions are recorded on the books as they occur, even if payment has not yet been received or made. Accruals represent liabilities and non-cash-based assets. ...
  2. Investing

    How To Decipher Accrual Accounting

    Accrual accounting is an important method of measuring the performance and position of a company. Learn more on how its used.
  3. Investing

    Earnings Quality: Investigating The Financing Of Accruals

    By Tim Keefe,CFA (Contact Author | Biography)Along with the time-series plots above, which illustrated scenarios where a firm experiences a large jump for two operating-assets accruals, investigation ...
  4. Investing

    Earnings Quality: Why Aren't All Earnings Equal?

    By Tim Keefe,CFA (Contact Author | Biography)One company's reported earnings are not of the same exact quality as another's because each management team uses its own judgment when recording business ...
  5. Investing

    Explaining Accrued Liability

    Accrued liability is an accounting term for an expense a business has incurred but has yet to pay.
  6. Investing

    What is Cash Basis Accounting?

    Cash basis accounting recognizes revenues and expenses at the time cash is paid or received.
  7. Investing

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
  8. Investing

    Cash Flow From Operating Activities

    Cash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
  9. Investing

    Accounting Basics: Financial Statements

    By Bob Schneider Financial statements present the results of operations and the financial position of the company. Four statements are commonly prepared by publicly-traded companies: balance ...
  10. Investing

    Understanding the Accounting Cycle

    An accounting cycle consists of the traditional procedures performed to record business events and transactions in a company’s accounting records.
RELATED FAQS
  1. When are expenses and revenues counted in accrual accounting?

    Take an in-depth look at the treatment of revenues and expenses within the accrual method of accounting and learn why many ... Read Answer >>
  2. What is accrual accounting used for in finance?

    Read about the accrual method of accounting, its uses and rules, and why it is considered so important for investors, lenders ... Read Answer >>
  3. What is the difference between an accrual and an account payable?

    Understand the difference between an accrual and an account payable. Learn how an accrual and an account payable affect a ... Read Answer >>
  4. When are businesses required to use accrual accounting?

    Determine when the accrual accounting method must be used instead of cash accounting. Most businesses use accrual accounting ... Read Answer >>
  5. How does accrual accounting differ from cash basis accounting?

    The main difference between accrual and cash basis accounting is the timing of when revenue and expenses are recognized. ... Read Answer >>
  6. When is revenue recognized under accrual accounting?

    Discover how to report revenue under the accrual method of accounting and why a firm recognizes revenue even when cash has ... Read Answer >>
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center