What are Accruals?

Accruals

To understand an Accrual we need to understand the meaning of the word accrual, which is “The act of accumulating something”. Accruals are mainly related to prepayments and arrears.

In the accrual based accounting, accruals refer to expenses and revenues that have been incurred or earned, but have not been recorded in the books of accounts. Adjustment entries are incorporated in the financial statements to report these at the end of an accounting period.

In other words, they consist of balance sheet accounts that are liability or a non-cash based assets. A few examples of accruals are accounts receivables, accounts payable, accrued rent, etc.

 

Accrued Expense is the expense which has been incurred, but has not been recorded in the books of accounts as of the present time. It will require an adjustment entry in the books of accounts to reflect this in the financial statements.

Accrued Income is the income which has been earned, but has not been recorded in the books of accounts. Similar to accrued expenses, an adjustment entry will be required in this case too.

 

Money owed by a business in the current accounting period is to be accrued and should be added to the expenses in the profit and loss account.

Money that is owed to a business in the current accounting period is to be accrued and should be added to the income in the profit and loss account.

 

Example 1

A company pays 25000 for rent every month. On January, 1 it pays 1,00,000 towards rent.

Now, the company didn’t record the payment as an expense, because the building has not been used yet. So when they report their quarterly results after March, 31, they will only report expenses for 25000 x 3 months = 75,000 because only 3 months rent has been used.

 

Example 2

Another example is when a company is supposed to receive the same amount of rent and the tenant pays 1,00,000 on January, 1.

Now, the company can’t record it as an income until the building has been used by the end of the rent period. So, again during the quarterly results after March, 31 an accrual entry will come into picture.