Accrue (Accounting)

To accrue, in accounting, is to record a revenue that has been earned or an expense that has been incurred during a period even though no cash has yet been received or paid and no invoice may yet have been processed. The entry that does this is called an accrual, and the resulting balances are described in the entry on accruals.

Accruing is the central mechanism of accrual accounting, which US GAAP requires for companies issuing general-purpose financial statements. It ensures that the income statement for a month, quarter or year shows the revenues and costs that belong to that period, while the balance sheet shows the related receivables and liabilities. Outside accounting, the word simply means to build up gradually, as interest accrues on a loan.

Imagine keeping a diary of the work you do and the help you use, rather than a log of money changing hands. If a neighbor walks your dog every day in March but you settle up on April 5, the dog walking still happened in March. Accruing means writing it into March's diary on March 31, with a note that you still owe for it.

The same works in reverse for money you are owed. If you tutored a student all month and will be paid next month, the earnings belong to this month's record, with a note that the money is still to come.

Accruals are usually made as adjusting entries at the end of an accounting period, before the financial statements are prepared. Every accrual has one income statement side and one balance sheet side.

• Accrued expense. Debit an expense account and credit a liability. A company whose employees earned $8,000 of wages in the last three days of December, to be paid on January 3, debits Wages Expense $8,000 and credits Wages Payable $8,000.
• Accrued revenue. Debit a receivable and credit a revenue account. A consultant who finished $5,000 of work in December but will bill in January debits Accounts Receivable, or Unbilled Receivables, and credits Service Revenue for $5,000.

When the cash later moves, the entry clears the balance sheet item rather than touching revenue or expense again. Paying the wages on January 3 debits Wages Payable and credits Cash. Many companies instead reverse the accrual on the first day of the new period and then record the payment normally, which gives the same result.

• Interest. Interest on a loan or note builds up daily, so the portion relating to the period is accrued as interest expense or interest income.
• Payroll and benefits. Wages, bonuses, vacation pay and payroll taxes earned by employees but unpaid at period end are accrued, as in accrued payroll.
• Utilities and rent. Services used before the bill arrives are estimated and accrued.
• Income taxes. Taxes on the period's profit are accrued even though returns are filed and paid later.
• Unbilled revenue. Work performed or goods delivered but not yet invoiced is accrued as accrued revenue.

Accruing is the opposite timing case to a deferral. An accrual records revenue or expense before the cash moves; a deferral records cash first, as with prepaid expenses or customer deposits, and recognizes the revenue or expense later.

Many accruals require estimates, because the exact bill has not arrived. If the estimate later proves wrong, the difference is usually recorded in the period the actual amount becomes known, as a change in estimate, rather than by restating earlier statements. Changes in accounting estimates of this kind are explained in change in accounting estimate. Auditors pay close attention to large accruals near year end, since over- or under-accruing is one of the simplest ways to shift profit between periods. The matching principle and revenue recognition rules are the anchors that decide what should be accrued and when.

• Financial Accounting Standards Board