Accrual

Accruals

Accruals are earned revenues and incurred expenses that have an overall impact on an income statement. They also affect the balance sheet, which represents liabilities and non-cash-based assets used in accrual-based accounting. These accounts include, among many others, accounts payable, accounts receivable, goodwill, future tax liabilities and future interest expenses.

The use of accrual accounts has greatly increased the amount of information on accounting statements. Before the use of accruals, accountants only recorded cash transactions on these statements. But cash transactions don't give information about other important business activities, such as revenue based on credit and future liabilities. By recording accruals, a company can measure what it owes in the short-term and also what cash revenue it expects to receive. It also allows a company to show assets that do not have a cash value, such as goodwill.

Using the accrual method, an accountant makes adjustments for revenue that has been earned but is not yet recorded in the accounts, and expenses that have been incurred but are not yet recorded in the accounts. The accruals must be added via adjusting journal entries, so that the financial statements report these amounts.

In double-entry bookkeeping, the offset to an accrued expense is an accrued liability account, which appears in the balance sheet. The offset to accrued revenue is an accrued asset account, which also appears in the balance sheet. Therefore, an accrual entry will impact the balance sheet and the income statement.

Accruals are revenues and expenses that are incurred during an accounting period for which no invoices or payments were received or made. Accruals are, therefore, estimated figures since the invoice, when received, may have different numbers. When invoice has been received, a company records the amount under the accounts payable (for money owing suppliers and vendors) or accounts receivable account (for money to be collected from customers) in the balance sheet.