What is an accrual?

Definition

An accrual is the recording of an expense or revenue when the work happens, not when cash moves. On the books, an expense accrual is a liability you will pay later; a revenue accrual is an amount you have earned but not yet billed.

It is a recognition, not a payment. Cash can follow in the next month without changing the date of the work.

Where it shows up

Balance sheet: Located in the current liabilities section for expense accruals; current assets for revenue accruals.

P&L: Increases expense or revenue in the period the work happened.

Cash flow: Related to cash moving later; when the liability is paid, reported cash from operating activities decreases.

See also: Accrual Basis Accounting · Accrued Liabilities · Adjusting Journal Entry

When you look at your Balance Sheet, an expense accrual sits in current liabilities as accrued liabilities. It stays there until the vendor bill arrives or the estimate is reversed.

When you look at your Income Statement, the accrual increases expense in the month the work happened. The period shows the cost even though no cash has left yet.

On the Statement of Cash Flows, cash has not moved yet. When the liability later decreases because the bill is paid, reported cash from operating activities decreases.

A large accrued-liabilities balance often means a lot of work is done and not yet billed. A small balance means most vendors had already invoiced.

The general ledger holds the adjusting journal entry that records the recognition. You will not find a line simply labeled accrual on the statements.

How it works

Start with work that has happened. If cash has not moved and no bill is in the file, the books still need the recognition.

How an accrual is booked:

• Confirm the work happened this period with no bill or cash yet
• Record an adjusting journal entry: expense (or revenue) and the matching Balance Sheet account
• Reverse the estimate next period when that is the shop's habit
• Let the real bill or invoice post without doubling the recognition
• Settle cash later; the payment does not create a second expense

Record an adjusting journal entry in the month of the work. Expense goes up, and accrued liabilities go up by the same amount.

The next month, a reversing journal entry often undoes that estimate. When the real bill posts, the cost does not double.

Revenue uses the same idea on the other side. Accrued revenue records earned work that is not yet billed, instead of an expense that is not yet paid.

Do not wait for a perfect invoice if the work is clearly this month's. A reasonable estimate keeps the month complete.

Do not record an accrual for work that has not happened. Next month's matter is not this month's cost, even if the engagement letter is already signed.

Cash later settles the liability. That payment does not create a second expense.

Example

A law firm uses outside counsel for a June matter. The work is done by June 30, and the $6,500 bill will not arrive until July.

The bookkeeper records this journal entry:

Debit: Legal expense $6,500

Credit: Accrued liabilities $6,500

June legal expense rises by $6,500, and June current liabilities rise by $6,500. Cash has not moved.

On July 10 the outside counsel bills $6,500. A reversing entry on July 1 has already cleared the accrual, and the July bill then records the cost against the same work without doubling it.

If the bill is $6,800, July picks up the extra $300. June still holds the $6,500 that was known at month-end.

Common mix-ups

An accrual is not accrual-basis accounting. Accrual-basis accounting is the whole method of recording revenue when earned and expenses when incurred; an accrual is one recognition under that method.

An accrual is not a vendor bill. Accounts payable is for bills that have arrived; an accrual is for work that has happened with no bill in the file yet.

An accrual is not a deferral. A deferral pushes recognition to a later period than the cash movement; an accrual records the work now and lets cash follow later.

Related terms

• Accrual Basis Accounting: Recording revenue when earned and expenses when incurred.
• Accrued Liabilities: Expenses incurred but not yet billed or paid at period end.
• Adjusting Journal Entry: An entry made at period end to record accruals, deferrals, and corrections.
• Deferral: Pushing recognition of a cost or revenue to a later period than the cash movement.
• Matching Principle: Recording expenses in the same period as the revenue they helped produce.
• Reversing Journal Entry: An entry posted at the start of a period to undo a prior period accrual.
• Accrual Cutoff: The period-end sweep to capture unbilled expenses in the period they belong to.
• Accrued Revenue: Revenue earned in the period but not yet billed or collected.