An accrual is a cost a business has already incurred but not yet been invoiced for, recorded in the period it belongs to. At month end you debit the expense and credit an accruals account, which is a liability on the balance sheet. When the supplier's invoice arrives, the accrual is reversed so the cost is only counted once. Accruals are also called accrued expenses.
Why accruals matter
Accounts prepared on the accruals basis match costs to the period in which they were incurred, not the period in which the paperwork turned up. Without an accrual, March's electricity lands in April's profit and loss, so March looks better than it was and April looks worse. One missing bill is a small distortion; a handful of them every month makes management accounts hard to trust.
The ACCA's guide to adjustments puts it simply: an accrual is an expense recognised in the period even though no invoice has been received. It is one of the routine month-end adjustments, alongside prepayments and depreciation.
Accrual journal: a worked example
A company with a 31 March month end hasn't received its electricity bill for March. Based on previous bills, it expects about £480 before VAT. The invoice arrives on 12 April for £492.
| Date | Account | Debit | Credit |
|---|---|---|---|
| 31 Mar | Electricity (expense) | £480 | |
| 31 Mar | Accruals (liability) | £480 | |
| 12 Apr | Accruals (liability) | £480 | |
| 12 Apr | Electricity (expense) | £480 | |
| 12 Apr | Electricity (expense) | £492 | |
| 12 Apr | Trade creditors | £492 |
March now carries £480 of electricity. In April, the reversal and the real invoice net to £12, the difference between the estimate and the bill. The accruals balance goes back to zero, and the supplier's invoice sits in trade creditors as normal. VAT is left out of the accrual and claimed from the invoice when it arrives.
For more journals with diagrams, see prepayments and accruals: worked examples.
Common examples of accruals
- Utilities billed after the period: electricity, gas, water and telephone.
- Professional fees for work already done, such as the accountancy or audit fee for the year.
- Accrued wages for days worked before the period end but paid in the next payroll, and bonuses earned but not yet paid.
- Interest on a loan that has built up since the last payment date.
- Goods or services received but not invoiced, such as stock delivered on 30 March with the invoice to follow.
- Subscriptions billed in arrears, where the supplier invoices after the month of use.
Accruals vs prepayments
Accruals and prepayments are mirror images. An accrual brings forward a cost you haven't been billed for yet. A prepayment pushes back a cost you have been billed for in advance.
| Accrual | Prepayment | |
|---|---|---|
| Timing | Cost incurred, not yet invoiced | Invoiced or paid, not yet used |
| Balance sheet | Current liability | Current asset |
| Month-end journal | Dr expense, Cr accruals | Dr prepayments, Cr expense |
| Typical example | March electricity billed in April | Annual insurance paid in January |
To work out either adjustment for a given period, use the free prepayments and accruals calculator.
How Briefcase Ledger handles accruals
Briefcase Ledger learns which supplier invoices recur. At month end, where an expected invoice hasn't arrived, it suggests an accrual for anything above your materiality threshold (£250 by default): debit the expense, credit Accruals. Nothing reaches the ledger until a person reviews and posts it. When the invoice arrives, Ledger drafts the reversal, so the cost isn't counted twice.
Taking on a client part-way through the year? Bulk import their existing accruals from a CSV of up to 500 rows.
Frequently asked questions
What is an accrual in simple terms?
An accrual is a bill you know is coming for something you have already used. You record the cost in the month you used it, with a matching liability, and reverse that entry when the actual invoice arrives.
Is an accrual a debit or a credit?
Both sides are used. The expense is debited and the accruals account is credited. Accruals is a liability account, so a credit increases it. When the accrual is reversed, the entries are swapped.
Are accruals a current liability?
Yes. Accruals are normally settled within a few months, so they sit in current liabilities, within creditors due within one year. UK accounts often show them on a line called accruals and deferred income.
Do accruals include VAT?
Usually not. An accrual is normally recorded net of VAT, because input VAT is claimed from the supplier's VAT invoice once it arrives. Briefcase Ledger posts accruals with no VAT.
What is the difference between an accrual and a provision?
An accrual is for goods or services already received where the amount is known or can be estimated reliably, such as a utility bill. A provision is for an obligation whose timing or amount is uncertain, such as a warranty claim or a legal dispute.