Accruals

Accrual in general means the accumulation of something. In finance, accruals are accumulation of either revenues (accrued revenues) or expenses (accrued expenses) that have not yet been reflected in the financial records. When companies use the term accruals, it automatically implies the next step, which is adjusting the entries in the accounting books to reflect actual financial status.

Accrued revenues or accrued assets may come from earnings that aren’t billed or paid until the next month. For example, a credit card company doesn’t prepare billing statements or get paid till the next month, even if the credit card holder makes purchases the month before. Because of this they need to make an adjustment on their entries so that their financial statements will show the proper revenues for the previous month.

On the other hand, accrued expenses come from entering expenses in the balance sheet that haven’t been paid out yet. A good example are employee bonuses that are automatically computed and recorded as expense, but that weren’t paid out on time for some reason. That means that adjustments in the entries need to be made to show liabilities under accounts payable.

When it comes to payrolls, employees become very interested in accruals due to conversion of their unused leaves. Note some accrual policies do not allow rollovers. In that case, any accruals earned by the end of the year need to be cashed out or used as leaves or end up wasted.

Comments
Leave a response

Leave a Response