What Is an Accrual in Accounting?

An accrual in accounting is an adjustment made to recognise revenue or expenses that have been earned or incurred but not yet recorded in the accounts. Accruals are essential for businesses using the accrual basis of accounting, as they ensure financial statements reflect economic activity within the correct reporting period—even if cash hasn't changed hands.

This method supports a more accurate view of a business’s performance over time, allowing for proper matching of income and expenses.

What Is an Example of an Accrual?

A common example of an accrual is unpaid wages. Suppose a company’s financial year ends on 31 December, but employees won’t receive their December wages until 5 January. Under accrual accounting, the company must still record the wage expense in December, even though the payment occurs in January. This way, the expense is recognised in the period when it was incurred.

Another example is accrued income. If a business provides a service in March but doesn’t invoice the client until April, the income must be recorded in March to match the period the work was done.

What Is the Difference Between a Payable and an Accrual?

While both refer to obligations to pay, they differ in their nature:

• A payable is usually triggered by a documented transaction, such as an invoice received from a supplier. It’s formal and clearly measurable.

• An accrual is recorded when no invoice has yet been received but an expense or income has still occurred. It’s based on estimation and timing, ensuring accounts are complete and accurate at period-end.

Put simply, payables are known and due, while accruals are anticipated or estimated.

Accrual Accounting vs Cash Accounting

The key distinction lies in timing:

• Accrual accounting records revenues and expenses when they are earned or incurred, regardless of when money is exchanged. It gives a fuller picture of financial health and is required by most large businesses and accounting standards.

• Cash accounting records income and expenses only when cash is received or paid. It’s simpler but can give a distorted view of performance, especially in businesses with long payment cycles.

For example, under cash accounting, if a company finishes a £10,000 project in December but gets paid in January, the income shows in January—not in the period when the work was actually done. Accrual accounting avoids this mismatch.

How Do You Record Accruals?

Recording accruals typically involves journal entries at period-end. These entries adjust the accounts to reflect revenues or expenses that haven’t yet been processed through invoicing or payment.

For example, to record accrued wages of £5,000:

• Debit: Wages Expense £5,000

• Credit: Accrued Liabilities (or Accrued Expenses) £5,000

Then, when the wages are paid:

• Debit: Accrued Liabilities £5,000

• Credit: Cash £5,000

This ensures the expense is matched to the right period, and the balance sheet reflects the obligation to pay.

What Are the Four Main Types of Accrual?

There are four primary categories:

1. Accrued Revenues – Income earned but not yet invoiced or received.

2. Accrued Expenses – Costs incurred but not yet invoiced or paid.

3. Deferred Revenues – Payments received in advance for goods or services to be delivered later (though technically a liability).

4. Deferred Expenses – Payments made in advance for future benefits, like insurance or rent.

Although deferred items are often grouped separately, they are part of the broader accrual framework and necessary for matching revenues and costs.

Common Types of Accruals

In practice, some accruals show up more frequently than others, including:

• Salaries and wages earned but unpaid

• Utility bills incurred but not yet received

• Interest on loans due but unpaid

• Taxes payable based on profits for the year

• Rent revenue from tenants earned but not yet billed

• Professional services provided but not yet invoiced

These accruals help ensure that financial reporting isn’t delayed or distorted by timing gaps between economic events and their related cash flows.

Conclusion

Understanding accruals is crucial for accurate financial reporting. They bridge the timing gap between when economic events occur and when they’re actually settled in cash. Whether you're recording unpaid wages, unbilled income, or estimating taxes, accruals allow you to stay aligned with accounting standards and give stakeholders a clear view of your business's real position.