Accruals

Accruals are accounting entries that recognize revenues earned and expenses incurred in a period, regardless of when cash is received or paid. They are a fundamental element of accrual basis accounting and support the matching principle, which seeks to align revenues with the expenses incurred to generate them within the same period.

Accrued revenues refer to revenue that has been earned but not yet billed or collected. For example, a service performed in December may be invoiced in January. The entry would debit Accounts Receivable and credit Revenue to recognize income in December. When the cash is eventually received, the entry would debit Cash and credit Accounts Receivable.

Accrued expenses are costs incurred but not yet paid or invoiced. For instance, wages earned by employees in December but paid in January would be recorded as a wage expense with a credit to Accrued Liabilities (or Accounts Payable). In the following period, payment reduces the liability and cash is credited.

Related concepts include prepaid expenses, where payment is made in advance and recognized as an asset until used, and unearned revenue, where cash is received before earning and recorded as a liability. Adjusting entries at period end are used to record accruals and ensure the financial statements reflect economic activity accurately.

Standards and practice: Accrual accounting, including accruals, is required or permitted under GAAP and IFRS. Cash accounting does not require accrual entries, but many organizations adjust for accruals to prepare accurate statements. Some accruals involve estimates, such as utilities or royalties.