Accrual Definition
An accrual is an entry in the financial books of a company that records a liability or income that has not yet been paid or received. An accrual represents something that the company expects to pay or receive in the future, regardless of whether or not it has the cash on hand to do so.
The purpose of an accrual is to ensure that all relevant costs and revenues are recognized in the correct period. For example, if a company incurs expenses in one period but doesn’t pay them until the following period, the expenses need to be recorded in the first period in order to properly reflect the company’s financial situation. Similarly, if a company receives revenue in one period but doesn’t bill for it until the following period, the revenue needs to be recorded in the first period.
There are two main types of accruals: accrued expenses and accrued revenues. Accrued expenses are costs that have been incurred but not yet paid. Common examples of accrued expenses include interest expense, salaries and wages expense, and rent expense. Accrued revenues are revenues that have been earned but not yet received. Common examples of accrued revenue include interest income, service revenue, and product sales revenue.
