Accrual

An entry that records revenue or expense in the period it is earned or incurred, before the cash moves.

DefinitionAn entry that records revenue or expense in the period it is earned or incurred, before the cash moves.

An accrual records revenue when it is earned and an expense when it is incurred, regardless of when cash changes hands. It is the core of accrual accounting, which US GAAP requires for most companies, and it is what keeps a month's costs in that month even when the invoice arrives later.

How it is computed

At period end, estimate the value of goods or services received (or delivered) but not yet invoiced, and post it: for an expense, debit the expense and credit accrued liabilities. Reverse it when the invoice is booked.

Example

A consultant does $12,000 of work in December, but the invoice arrives on January 15. The December books accrue $12,000 of expense. In January the accrual is reversed and the $12,000 invoice is booked, so January shows no net cost for December's work.

Where it goes wrong

Accruals that are never reversed, so the expense is counted twice, and estimates that drift far from the eventual invoice. Missing accruals push costs into the wrong month and distort margins. The full comparison is accrual vs cash accounting.

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