Definition
An accrual is a cost the business has incurred by the end of an accounting period but has not yet been invoiced for or paid. It is included in that period's expenses and shown on the balance sheet as a liability.
Why they are needed
Accounts show income and costs in the period they relate to, not when money changes hands. If the electricity used in the last month of the year will not be billed until after the year end, an accrual puts the cost into the right year.
Common examples
- The accountancy fee for preparing the year’s accounts.
- Utilities and phone bills received after the year end.
- Wages and bonuses earned but not yet paid.
- Interest on a loan that has built up but not been charged.
Accruals appear on the balance sheet under creditors falling due within one year.
Related terms
| Term | Meaning | On the balance sheet |
|---|---|---|
| Accrual | A cost incurred but not yet billed | Creditor |
| Prepayment | A cost paid in advance for a later period, such as insurance | Debtor |
| Accrued income | Income earned but not yet invoiced | Debtor |
| Deferred income | Income received in advance of doing the work | Creditor |
Read more: Posting journals, Creditors within one year and The debtors note.