Accrue

What is 'Accrue'

Accrue is a term used to describe the ability for something to accumulate over time, and is most commonly used when referring to the interest, income or expenses of an individual or business. Interest in a savings account, for example, accrues so that over time, the total amount in that account grows. The term "accrue" is often related to the concepts of accrual accounting, which has become the standard accounting practice for most companies.

BREAKING DOWN 'Accrue'

When something finance-related accrues, it essentially builds up to be paid or received in a future period. Both assets and liabilities can accrue over time. This is why the term "accrue," when related to finance, is synonymous with an "accrual" under the accounting method outlined by Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS). An accrual is an accounting adjustment used to track and record revenues that have been earned but not received or expenses that have been incurred but not paid.

The accrual accounting procedure, therefore, measures the performance and position of a company by recognizing economic events regardless of when cash transactions occur, giving a better picture of the company's financial health and causing asset or liability adjustments to build up over time. This is in contrast to the cash method of accounting where revenues and expenses are recorded when cash is actually paid or received. Cash-based accounting does not need adjustments.

Companies normally prefer the accrual accounting method. If a company sold $100 worth of product on credit in January, for example, it would want to record that $100 in January under the accrual accounting method rather than wait until the cash is actually received, which may take months or may even become bad debt.

Types of Accounting Accruals

All accruals are either a revenue or expense accrual. Revenue accruals are easy to understand in that they occur when a good or service has been sold by a company but the money has not been received from the customer. Companies with large amounts of credit card transactions usually have high levels of accounts receivable and high levels of accrued revenue.

Expense accruals can be varied. Interest expense accruals are made by a company that owes monthly interest on debt prior to receiving the monthly invoice. Supplier accruals are made when a company receives a good or service from a third-party supplier on credit and plans to pay the supplier at a later date. This type of accrual is recorded under accounts payable and is considered an accrued operating expense. Wage accruals are made by companies that pay employees prior to the end of the month for a full month of work.

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