An accrual refers to the accumulation of interest, income, or expenses over a specific period of time.
What Is Accrue?
In simple terms, an accrual is the accumulated amount built up to be paid or received, usually in the form of income, interest, or expense that occurred in the past. An example would be a business sending goods or services to a customer in the month of December but receiving payment in the month of February, thus the amount owed by the customer to the business is accrued.
An accrual generally occurs in a business when sales are made on a credit basis to customers or the raw material is purchased on credit from a supplier.
Accruals in Accounting
The accounting concept of accruals states that the revenues and expenses that business records should be recognized in the accounting period in which the transactions occur instead of when the payment is received or paid.
Let’s take an example of a business that just sold goods to a customer on a credit basis. This transaction should be recorded as a sale even though payment was not received immediately. When the payment is received, an entry to reduce trade receivables and increase the cash or bank balance will be made. Therefore, we record the sale as accrued on the date the customer received the goods or services instead of when the customer actually paid for the goods or services provided by the business.
How Are Accruals Treated in Accounts?
Accruals are treated as either an asset or a liability-
Assets: An accrual is treated as an asset when the business sells goods or services on credit to a customer and does not expect payment at the time of delivery. This is often seen in cases where clients’ liquidity is low and they cannot pay full amounts instantly and may require some time due to a slow receivable period. This is when the business adds the balance owed by the customer to the trade receivables account.
Liabilities: An accrual is recorded as a liability when the business purchases goods or services from its suppliers or even accrued rent for its premises. Such a transaction is an accrual when the business takes delivery of the goods or services but pays the suppliers on a later date. It records an accrued liability by adding the amount owed to the supplier to the trade payables account which is the account used when the business purchases goods or services related to their business activities.
When a transaction takes place, income or expense, it is recorded in the balance sheet as well as the income statement. The balance from the balance sheet is written off once the amount due is paid or received, according to the nature of the transaction.