When the work runs ahead of the cash
In the previous guide you met the deferral — cash that arrives before the revenue or expense it relates to, parked on the balance sheet and released over time. An [[accrual|accrual]] is its mirror image. Here the economic event runs ahead of the money: you have already earned something, or already used something up, but no cash has moved and often no bill has even been written. Under accrual accounting, the books are supposed to follow the event, not the payment — so at period-end you must reach back and record what really happened.
Two everyday pictures make it concrete. A bank deposit quietly earns you interest all through December, but the bank only credits your account in January — the interest is yours now, even though the cash is not. Your one employee works the last three days of December, but payday is not until mid-January — that labour is December's cost, even though the wages will leave the bank next month. Both are accruals: real events the cash record has not yet caught up with.
Accrued revenue: earned, but the invoice is still in your pocket
[[accrued-revenue|Accrued revenue]] is income you have genuinely earned but have not yet billed or been paid for. Picture a consultant on a 20-day project, charging 500 a day. By 31 December she has finished 12 days of work — 6,000 of value delivered — but she has agreed to invoice the whole job in January. If she closed her books and recorded nothing, December's income would understate what December actually did.
Because the customer now owes her, the earned amount becomes an asset — a receivable. The adjusting entry debits a receivable and credits a revenue account: debit Accounts Receivable 6,000, credit Consulting Revenue 6,000. December's income statement now reflects the 12 days actually worked, and the balance sheet shows a 6,000 claim on the customer. When the invoice is finally paid in January, she debits Cash and credits the receivable — the revenue is not counted a second time.
Accrued expense: incurred, but the bill has not arrived
An [[accrued-expense|accrued expense]] is the twin on the cost side: a cost you have incurred but not yet paid, and often not even been billed for. Think of the electricity humming through your office in late December. You consumed the power, but the utility will not send its bill until mid-January. You already owe for something you have used. This is a direct application of the matching principle — the cost of running December belongs in December, billed or not.
Take the salaries example head-on. Suppose your team earned 2,000 of wages for the final days of December, payable on the next payroll run in January. The adjusting entry debits an expense and credits a payable: debit Wages Expense 2,000, credit Wages Payable 2,000. The expense lands in December, where the work was done, and a 2,000 liability sits on the balance sheet as an accrued liability. When payroll runs in January, you debit Wages Payable and credit Cash — settling the obligation without charging the expense twice.
A frequent confusion is mixing accrued expenses up with accounts payable. Accounts payable usually rests on an invoice you have actually received; an accrued expense is often estimated before any bill arrives, which is why it lives among the period-end adjustments rather than the day-to-day transactions.
A worked example: interest payable, day by day
Interest is the cleanest accrual to compute, because it grows with the calendar whether or not anyone sends a statement. Suppose on 1 December you borrow 60,000 at 10% a year. Over the whole of December the loan has quietly accumulated one month of interest: 60,000 × 10% × (1 ÷ 12) = 500. No payment is due until the spring, but by 31 December you genuinely owe that 500. Leaving it out would understate December's expense and hide a real obligation.
Loan principal: 60,000 Rate: 10%/yr Time: 1 month
Interest = 60,000 x 0.10 x (1/12) = 500
Dec 31 adjusting entry Debit Credit
Interest Expense 500
Interest Payable 500
(accrue Dec interest, unpaid)
Jan (when paid) Debit Credit
Interest Payable 500
Cash 500
(settle the accrued liability)Notice the symmetry with accrued revenue. There you debited a receivable (an asset) and credited revenue; here you debit an expense and credit a payable (a liability). In both cases recognition comes first and cash trails behind — the defining feature of an accrual, and the exact opposite of the deferrals from the last guide, where cash came first.
Why it matters — and a safe way to spot them
Accruals are what let the financial statements tell the truth about a moment in time. Without the wages accrual, December's profit looks too high and the balance sheet pretends you owe nothing for work already done. Without the interest accrual, the same illusion. Recording accruals pulls hidden obligations into the open and matches each period's revenue with the cost of producing it — giving a faithful picture of what the business has earned and what it truly owes at period-end.
Be honest about the catch: accruals lean on estimates and judgement about how much has truly been earned or incurred. That latitude lets well-run firms portray reality faithfully, but it also gives dishonest ones room to inflate revenue or bury costs — which is exactly why auditors scrutinise accruals so closely. The fix is not to skip them (that distorts the statements outright) but to base each estimate on solid evidence.
- Ask: has the event already happened — revenue earned, or a cost incurred — by period-end? If yes, an accrual may be due.
- Check the cash: confirm no cash has moved yet. If cash already changed hands, you are looking at a deferral, not an accrual.
- Earned by you? Debit a receivable (asset) and credit revenue. Incurred by you? Debit an expense and credit a payable (liability).
- Never debit or credit Cash — and carry the new balances forward into the adjusted trial balance.