Accrual
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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 (economics), production, Distribution (economics), distribution, and Consumption (economics) ...
, the adding together of
interest In finance and economics, interest is payment from a debtor, 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 ...
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 ju ...
, 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 rev ...
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. The proceeds are also an accrued income (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 busine ...
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 Wealth, fortune in general, to another person or group as payment for an item, service, or other category of costs. For a leasehold estate, tenant, renting, rent is an expense. Fo ...
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. 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 busine ...
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 which is based on accruals is called .


Accrued revenue

Accrued revenue (or accrued assets) is an
asset In 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 of ownership that c ...
, 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 rev ...
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 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. 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 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 fina ...
, 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 party (law), parties Regulation, regulating the provision of paid Labour (human activity), labour services. Usually based on a employment contract, contract, one party, the employer, which might be a co ...
will provide for
employee Employment is a relationship between two parties regulating the provision of paid labour services. Usually based on a contract A contract is a legally enforceable agreement between two or more Party (law), parties that creates, define ...
s 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 festiv ...
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. Beca ...
. 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 subject research, human participants designed to answer specific questions about biomedical or behavioral interventions, including new treatments (such as novel v ...
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 * Accrued liabilities * Revenue recognition *
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 days l ...
* Deferrals 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)