What are accruals?

Understanding accruals

Accruals are a fundamental feature of the accrual basis of accounting. They are used when the economic effect of a transaction occurs in a different accounting period from the related cash movement, ensuring that financial statements reflect business activity as it happens rather than when payments are made.

Expense accruals arise when goods or services have been received but the supplier has not yet been paid or invoiced. Income accruals occur where goods or services have been provided but payment has not yet been received. Recording these adjustments helps ensure that income and expenses are matched to the correct reporting period.

Accruals are recognised under UK accounting frameworks such as FRS 102, FRS 105 and IFRS Accounting Standards. They are typically reversed or settled once the related invoice is processed or payment is made.

Key features of accruals

Key features include:

• They recognise income and expenses before the related cash is received or paid.
• They ensure transactions are reported in the correct accounting period.
• Accruals support the preparation of financial statements under the accrual basis of accounting.
• They commonly relate to unpaid expenses, earned income or outstanding invoices.
• Accruals are normally adjusted or reversed once the underlying transaction is settled.

How accruals work

• A transaction gives rise to income or an expense before any cash changes hands.
• An accounting adjustment is recorded to recognise the transaction in the correct reporting period.
• The accrual is included in the financial statements for that accounting period.
• When payment is made or received, or an invoice is processed, the accrual is reversed or settled.

Accruals in practice

A business receives legal services in March but does not receive the invoice until April. An accrual is recognised in the March financial statements to reflect the cost incurred during that accounting period. When the invoice is received and paid, the accrual is reversed and replaced by the actual liability.

Related terms

• Accrual basis of accounting
• Prepayments
• Accounts payable
• Accounts receivable
• Revenue recognition
• Financial statements
• Accounting policies
• Journal entry

Common misconceptions

• Accruals do not represent estimated future costs with no underlying obligation.
• They are not the same as prepayments, which relate to payments made in advance.
• Recording an accrual does not mean cash has been paid or received.

Frequently asked questions about Accruals

What are accruals in accounting?

Accruals are accounting adjustments that recognise income earned or expenses incurred before the related cash is received or paid.

Why are accruals important?

They ensure income and expenses are recorded in the correct accounting period, providing a more accurate representation of financial performance.

What is the difference between an accrual and a prepayment?

An accrual recognises income or expenses before cash is received or paid. A prepayment relates to amounts paid or received in advance of the period to which they relate.

Are accruals recorded at the end of an accounting period?

They are commonly recognised during the period-end reporting process to ensure the financial statements include all relevant income and expenses for that reporting period.

Do accruals affect cash flow?

No. Accruals are accounting adjustments and do not involve an immediate movement of cash.