accrual

Sometimes the work happens before any cash does. You earn interest on a deposit that the bank pays only next month; your staff work the final days of the year for wages paid in January; you finish a job but have not sent the invoice yet. The economic event — earning or using something — has already taken place, but the cash trails behind. An accrual is the accounting device that records that revenue or expense now, in the period it belongs to, and parks the matching amount as a receivable or payable until the cash catches up.

There are two kinds, mirroring deferrals. An accrued revenue is income earned but not yet received: you debit a receivable (asset) and credit revenue. An accrued expense is a cost incurred but not yet paid: you debit an expense and credit a payable (liability). In both cases recognition comes first and cash comes later — the exact opposite ordering of a deferral. For instance, if a loan has accumulated 150 of interest you owe by 31 December, you accrue it now: debit Interest Expense 150, credit Interest Payable 150, even though you will pay in January.

Accruals are the foundation of accrual accounting itself — the system, used by virtually all sizeable organisations, in which revenue and expenses are recorded when earned or incurred rather than when cash moves. They make profit reflect economic activity rather than the timing of payments. The honest caveat is that accruals depend on estimates and judgement about what has truly been earned or incurred, which gives well-run firms a faithful picture but also gives dishonest ones room to manipulate, which is why auditors scrutinise them closely.