Harness Money

What is accruals?

Accruals in accounting refer to the recognition of revenues or expenses in financial statements before the associated cash transactions occur. They are adjustments made to ensure that financial statements reflect the economic activities of a business accurately, even if cash has not been exchanged.

There are two common types of accruals:

1. Accrued Revenues: Accrued revenues are revenues that have been earned but not yet received in cash. They typically arise when goods or services are provided to customers, but payment is expected to be received in a subsequent accounting period. Examples of accrued revenues include unbilled services, interest income, or rental income.

2. Accrued Expenses: Accrued expenses are expenses that have been incurred but not yet paid in cash. These expenses arise when goods or services are received by a company, but the payment is expected to be made in a future accounting period. Examples of accrued expenses include wages payable, interest expense, or utilities expense.

Accruals are necessary to ensure that financial statements accurately reflect the revenue and expenses of a business in the period in which they are incurred or earned, regardless of cash movements. They help provide a more complete and accurate picture of a company’s financial position and performance.

To record accruals, adjusting journal entries are made at the end of an accounting period. These entries recognize the accruals by debiting the relevant expense or asset account and crediting a corresponding liability or revenue account. Once the cash transaction occurs in a subsequent period, the accrued amount is reversed, and the cash transaction is recorded accordingly.

Accruals play a crucial role in the accrual accounting method, aligning revenue recognition and expense matching principles to provide a more accurate representation of a company’s financial results.