Definition of Accruals: Accrual means an expense or revenue that is incurred in a period but not paid for or collected until the next period.
Great, so what does that mean?
An accrual is an accounting method where revenue or expenses are recorded when the delivery of the product or service occurs rather than when payment is received or made.
It does depend on what method you use for your accounts but most accountants will use accruals when compiling your year-end accounts.
An example for revenue:
Your year end is 31 August
You have already agreed a fee for a job and completed the work in August. But for whatever reason you have not invoiced the client yet. At the end of August your figures will show that you spent some time and money on this job but you didn’t earn any income for the job (as you have not invoiced it yet). To make the figures more realistic your accountant will accrue the revenue/ sales value of the job in August to match it to the time and cost which are already accounted for.
Your records show this: Job A | After an accrual is added they show this: Job A | ||
Income Expenses Profit | 0 500 -500 | Income Expenses Profit | 2,000 500 1,500 |
It ignores the date of the cash transaction and looks at what was done and when, so that the accounts represent a more realistic view of what is happening.
An example for expenses:
Your year-end is 31 December
You have designed an amazing ad campaign for a client and agreed to get some of the items printed for them as they need it all before Christmas. You have ordered them from your printer contact and he has costed it at £1,600 said he will add it to the bill he is sending you next month – in January. The artwork comes and you hand it over to the client mid-December, they love it and they pay your invoice for the work. If you look to see how profitable this job was without an expense accrual you will get a misleading result.
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