You may have heard your accountant talk about accruals in the past, or even just seen them in your financial statements and have no idea what these things might be. Accruals are a vital accounting concept that ensure costs are recognised in the period that they occur, this may not line up with when they are actually paid. This lines up with the idea that costs and expenses should be matched off in the period that they are earned or used.
Expense accruals are expenses that have been incurred but are not yet recorded in the accounts. This usually means expenses that have been spent but an invoice has not been received. For example if you buy supplies on account from a wholesaler at the end of the month you may not pay for these or receive the invoice until the next month, however the costs still to be taken when the supplies are used. Another example is employee bonuses that relate to one financial year, ending 31 December, but will not be paid until the next financial year, say March. The expense for these bonuses need to recognised in the year to December even though the cash will not actually be paid out until March the next year. Other common examples of accruals are quarterly utility bills and rent, annual insurances and professional fees.
Accruals need to be added to the accounts by adjusting entries at the end of the relevant period. Accruals impact both the Profit and Loss statement, by increasing the expenses in the period, and the balance sheet. The accounting entry to post an Accrual is the expense (debit) to the Profit and Loss, and the liability (credit) to the Balance Sheet to an Accrued Liability account to recognise the money owed.
As mentioned above, Accruals are expenses that are incurred during an accounting period for which no invoices or payments were received or made. Accruals have to be made based on estimated figures since the invoice, when received, may have different numbers. When the invoice has been received, a company records the amount under the accounts payable (for money owing suppliers and vendors) in the balance sheet.
Recording Accruals increases the amount of information in the accounting statements by showing future liabilities. They also enable the company to measure what it owes in the short-term which would not be possible if they were just recording cash transactions.