Accrual (''accumulation'') of something is, in
finance
Finance is the study and discipline of money, currency and capital assets. It is related to, but not synonymous with economics, the study of production, distribution, and consumption of money, assets, goods and services (the discipline of f ...
, the adding together of
interest
In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...
or different
investment
Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort.
In finance, the purpose of investing is ...
s over a period of time.
Accruals in accounting
For example, a company delivers a product to a customer who will pay for it 30 days later in the next
fiscal year
A fiscal year (or financial year, or sometimes budget year) is used in government accounting, which varies between countries, and for budget purposes. It is also used for financial reporting by businesses and other organizations. Laws in many ...
, which starts a week after the delivery. The company recognizes the proceeds as a
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
in its current
income statement
An income statement or profit and loss accountProfessional English in Use - Finance, Cambridge University Press, p. 10 (also referred to as a ''profit and loss statement'' (P&L), ''statement of profit or loss'', ''revenue statement'', ''stateme ...
still for the fiscal year of the delivery, even though it will not get paid until the following
accounting period
An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared.
In management accounting the accounting period varies widely and is determined by management. Monthly accoun ...
. The proceeds are also an
accrued income
Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time.
Accruals in accounting
For example, a company delivers a product to a customer who will pay for it 30 days l ...
(asset) on the
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
for the delivery fiscal year, but not for the next fiscal year when cash is received.
Similarly, the salesperson who sold the product earned a commission at the moment of sale (or delivery). The company will recognize the commission as an
expense
An expense is an item requiring an outflow of money, or any form of fortune in general, to another person or group as payment for an item, service, or other category of costs. For a tenant, rent is an expense. For students or parents, tuition is a ...
in its current income statement, even though the salesperson will actually get paid at the end of the following week in the next
accounting period
An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared.
In management accounting the accounting period varies widely and is determined by management. Monthly accoun ...
. The commission is also an accrued liability on the
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
for the delivery period, but not for the next period when the commission (cash) is paid out to the salesperson.
The term ''accrual'' is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic/accounting characteristics.
* Accrued revenue: revenue is recognized before cash is received.
* Accrued expense: expense is recognized before cash is paid out.
The
basis of accounting
A basis of accounting is the time various financial transactions are recorded. The cash basis (EU VAT vocabulary ''cash accounting'') and the accrual basis are the two primary methods of tracking income and expenses in accounting.
Both can ...
which is based on accruals is called .
Accrued revenue
Accrued revenue (or accrued assets) is an
asset
In financial accountancy, financial accounting, an asset is any resource owned or controlled by a business or an economic entity. It is anything (tangible or intangible) that can be used to produce positive economic value. Assets represent value ...
, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related
revenue
In accounting, revenue is the total amount of income generated by the sale of goods and services related to the primary operations of the business.
Commercial revenue may also be referred to as sales or as turnover. Some companies receive reven ...
item is recognized, while cash is to be received in a later period, when the amount is deducted from ''accrued revenues''.
In the rental industry, there are specialized
revenue accruals for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date. For example, a rental contract which began on 15 January, being invoiced on a
recurring
Recurring means occurring repeatedly and can refer to several different things:
Mathematics and finance
*Recurring expense, an ongoing (continual) expenditure
*Repeating decimal, or recurring decimal, a real number in the decimal numeral syste ...
monthly basis will not generate its first invoice until 14 February. Therefore, at the end of the January financial period an accrual must be raised for sixteen days' worth of the monthly charge. This may be a simple pro-rate basis (e.g. 16/31 of the monthly charge) or may be more complex if only week days are being charged or a standardized month is being used (e.g. 28 days, 30 days etc.)
Accrued expense
Accrued expense is a
liability whose timing or amount is uncertain by virtue of the fact that an invoice has not yet been received.
The uncertainty of the accrued expense is not significant enough to qualify it as a
provision
Provision(s) may refer to:
* Provision (accounting), a term for liability in accounting
* Provision (contracting), a term for a procurement condition
* ''Provision'' (album), an album by Scritti Politti
* A term for the distribution, storing an ...
. An example of an accrued expense is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a later
accounting period
An accounting period, in bookkeeping, is the period with reference to which management accounts and financial statements are prepared.
In management accounting the accounting period varies widely and is determined by management. Monthly accoun ...
when the amount is deducted from ''accrued expenses''.
Under
International Financial Reporting Standards
International Financial Reporting Standards, commonly called IFRS, are accounting standards issued by the IFRS Foundation and the International Accounting Standards Board (IASB). They constitute a standardised way of describing the company's f ...
, this difference is best summarized by IAS 37 which states:
To add to the confusion, some legalistic accounting systems take a simplistic view of 'accrued revenue' and 'accrued expenses", defining each as revenue or expense that has not been formally invoiced. This is primarily due to tax considerations, since in some countries, the act of issuing an invoice creates taxable revenue, even if the customer does not ultimately pay and the related receivable becomes noncollectable.
Accruals in payroll
In
payroll
A payroll is the list of employees of some company that is entitled to receive payments as well as other work benefits and the amounts that each should receive. Along with the amounts that each employee should receive for time worked or tasks pe ...
, a common benefit that an
employer
Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract, one party, the employer, which might be a corporation, a not-for-profit organization, a co-operative, or any othe ...
will provide for
employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick leave or
vacation
A vacation (American English) or holiday (British English) is either a leave of absence from a regular job or an instance of leisure travel away from home. People often take a vacation during specific holiday observances or for specific festi ...
time and this time is placed into a
bank
A bank is a financial institution that accepts deposits from the public and creates a demand deposit while simultaneously making loans. Lending activities can be directly performed by the bank or indirectly through capital markets.
Because ...
. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.
Length of service
For most employers, a time-off
policy
Policy is a deliberate system of guidelines to guide decisions and achieve rational outcomes. A policy is a statement of intent and is implemented as a procedure or protocol. Policies are generally adopted by a governance body within an organ ...
is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time.
Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).
Trial period
In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days) where no time is awarded to the employee. This does not prevent an employee from calling in sick immediately after being hired, but it does mean that they will not get paid for this time off. However, it does prevent an employee, for example, scheduling a vacation for the second week of work. After this trial period, the award of time may begin or it may be retroactive, back to the date of hire.
Rollover/carry over
Some accrual policies have the ability to carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that is in the bank is usually lost at the end of the employer's calendar year.
Other uses
When referring to
clinical trial
Clinical trials are prospective biomedical or behavioral research studies on human participants designed to answer specific questions about biomedical or behavioral interventions, including new treatments (such as novel vaccines, drugs, dietar ...
s, the definition of "accrual" is either the process of recruiting patients into a trial, or the number of patients in a trial.
See also
*
Accrued interest
*
Accrued jurisdiction
{{Use dmy dates, date=June 2018
Accrued jurisdiction within the context of the Australian legal system is the power held over state matters by federal courts. Accrued jurisdiction will occur when there are several cases brought to the Federal Cour ...
*
Accrued liabilities Accrued liabilities are liabilities that reflect expenses that have not yet been paid or logged under accounts payable during an accounting period; in other words, a company's obligation to pay for goods and services that have been provided for wh ...
*
Revenue recognition
The revenue recognition principle is a cornerstone of accrual accounting together with the matching principle. They both determine the accounting period in which revenues and expenses are recognized. According to the principle, revenues are reco ...
*
Matching principle
In accrual accounting, the matching principle instructs that an expense should be reported in the same period in which the corresponding revenue is earned, and is associated with accrual accounting and the revenue recognition principle states tha ...
*
Accrual basis accounting
Accrual (''accumulation'') of something is, in finance, the adding together of interest or different investments over a period of time.
Accruals in accounting
For example, a company delivers a product to a customer who will pay for it 30 day ...
*
Deferral
A deferral, in ''accrual accounting'', is any account where the income or expense is not recognised until a future date (accounting period), e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of ...
s in accounting
References
External links
{{Wiktionary, accrue, accrual
Transition to Accrual Accounting—
International Monetary Fund
The International Monetary Fund (IMF) is a major financial agency of the United Nations, and an international financial institution, headquartered in Washington, D.C., consisting of 190 countries. Its stated mission is "working to foster globa ...
Technical Guidance Note
Accounting terminology
Liability (financial accounting)