Accruals Definition, Types & Examples in Accounting

What are accruals?

Accruals are accounting adjustments that recognize revenues or expenses when they are earned or incurred, rather than when cash is actually received or paid.

They are a feature of accrual accounting, which aims to match income and expenses to the period in which they occur, providing a more accurate picture of a company’s financial performance.

There are two main types of accruals:

1. Accrued revenues - This is income that a business has earned by providing goods or services that they have not yet received payment for.

For example, a company may complete a service in December but not receive payment until January; under accrual accounting, the revenue is recorded in December.2. Accrued expenses - These are expenses that a business owes but has not yet paid.

For instance, a company might receive electricity in December but pay the bill in January; the expense is recorded in December to match it with the period in which it was incurred.

The idea behind accruals is to ensure that financial statements reflect the true financial position and performance of a company during a given accounting period, rather than just showing cash movements.

Cash basis vs. accrual basis

The accrual method of recording financial transactions reflects when transactions are earned or owed, instead of when money changes hands.

In other words, revenues are recorded when earned, even if the money hasn’t been collected yet, and expenses are recorded when incurred, even if they haven’t been paid yet.

This is helpful if you allow customers to pay on credit or buy from suppliers on credit, or if you carry inventory. Since there's often a delay between making a sale and getting paid, or buying something and paying for it, accrual accounting gives you a more complete view of what's really happening financially.

This is different to cash basis bookkeeping, which records transactions only when money actually moves, like when you pay a supplier or receive payment from a customer.

Small businesses often prefer this method because it gives them a clear picture of how much cash they actually have on hand right now.

Although cash basis is simpler, accrual accounting is generally considered more accurate because it shows the true financial health of your business at any given moment. It's also required for public companies and any business that needs to follow GAAP (Generally Accepted Accounting Principles) standards.

Accrual vs. deferral

Accruals and deferrals are both common concepts in accrual accounting, and they don’t sound that different, but they work in opposite ways.

Accruals involve recognizing revenues or expenses before cash is received or paid, this means that a business records income it has earned even if payment hasn’t arrived yet, or records expenses it has incurred even if it hasn’t paid for it yet.

For example, a company may perform a service in December but receive payment in January (accrued revenue), or it may owe employees’ salaries for December that will be paid in January (accrued expense).

Accruals ensure that financial statements reflect the true financial activity of a period, not just the cashflow.

Deferrals, on the other hand, involve recognizing revenues or expenses after cash has been exchanged.

They occur when cash is received or paid in advance of the related transaction.

For instance, cash received for services that will be provided in the future is recorded as deferred (unearned) revenue, while rent paid for a future month is recorded as a prepaid expense.

In essence, accruals bring future cash transactions into the current period’s accounts, whereas deferrals postpone recognition of cash transactions until the period in which they actually apply. Together, accruals and deferrals help ensure that revenues and expenses are matched to the correct accounting period, providing a more accurate picture of a company’s financial position.

Accruals with accounting software

Accounting software can be very useful in resolving many of the challenges associated with accrual accounting.

Its AI and automation features help simplify the complex record-keeping required, with tasks like tracking AR/AP, prepayments, and accrued expenses getting done automatically, reducing the need for extensive manual input and specialized accounting knowledge.

This saves time and reduces errors, making it easier for small businesses with limited expertise to keep accurate records.

Accounting software also often includes built-in tools and templates for common accrual adjustments like depreciation schedules, bad debt calculations, and expense accruals.

These features will help you be consistent in applying accounting estimates and will reduce subjectivity, improving the reliability of your financial information.

Additionally, many systems allow users to update assumptions easily as new information becomes available, ensuring that financial reports remain accurate and up to date.

Accounting software can also help businesses manage timing differences between profits and cashflow. By integrating accrual-based accounting with real-time cash tracking, software can generate both accrual and cash-based reports simultaneously.

This allows users to see how profits align with actual cash availability, enabling better decision-making and liquidity management.

Furthermore, accounting software significantly lowers the administrative burden associated with accrual accounting.

Automated journal entries, reconciliations, and end-of-period adjustments make financial reporting more efficient, freeing up time for higher-level analysis.

This reduces the need for large accounting teams and lowers compliance costs, particularly for small and medium-sized firms.

Finally, accounting software makes financial information more accessible and understandable.

Many platforms feature dashboards and visual reports that present complex data in clear, easy-to-read formats. This helps non-accountants - most likely your clients - understand financial insights without needing to interpret technical accounting statements. Most software also stays updated with current accounting standards such as GAAP or IFRS, helping businesses remain compliant with minimal manual effort.

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