Accrual

Accrual or accumulation of something is, in financial terms, the adding together of interest or different investment sources over a period of time.

It holds specific meanings in accounting, where it can refer to accounts on a balance sheet that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.

For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery.
The company recognizes the proceeds as a revenue in its current income statement still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period. The proceeds are also an accrued income (asset) on the balance sheet for the delivery fiscal year, but not for the next fiscal year when cash is received.

Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense in its current income statement, even though the salesperson will actually get paid at the end of the following week in the next accounting period. The commission is also an accrued expense (liability) on thebalance sheet for the delivery period, but not for the next period when the commission (cash) is paid out to the salesperson.

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One comment

  1. Hallo there,

    I wonder, out of curiosity, who your target reader is for this article?
    Accountants will already know these definitions and will quote them directly from IFRS.
    Small business owners may find benefit in this sort of article, but I think that, if your focus is on them, that perhaps it may be a good idea to apply the information on a more practical level. Why do we need accruals? What happens when we do not accrue? What does accruing mean for the financial statements and, especially, for financial performance?

    Just a thought.

    Happy writing!

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