Introduction
To understand accruals, one has to understand the meaning of the word accrual, which is "the act of accumulating something". Accruals relate primarily to prepayments and arrears.
In accrual-based accounting, accruals refer to expenditures and revenues incurred or earned but not recorded in account books. Adjustment entries to report these at the end of an accounting period are incorporated in the financial statements.
Understanding Accruals
An accrued expense is an expense incurred, but currently not recorded in the account books. To reflect this in the financial statements, it will require an adjustment entry in the account books.
Accrued income is revenue received but not actually reported in the account books. In this case, too, an adjustment entry will be required, similar to the accrued expenses. Some examples of accruals may include receivables, accounts payable, accrued rent, and so on.
In the current accounting period, money owed by a company is to be accrued and will be added to the costs in the profit and loss account. In the current accounting period, money owed to a business must be accrued and should be added to the income in the profit and loss account.
Example
In double-entry bookkeeping, an accrued liability account is the offset to an accrued expense which appears in the balance sheet. The offset to accrued revenue is an accrued account of assets that appears on the balance sheet, too. Adjusting journal entry for accrual will, therefore, have an impact on both the balance sheet and the profit and loss account.
For example, a company with a debenture will accrue interest expense on its monthly financials, although interest on debentures is typically paid semi-annually. The interest expense recorded through an adjusting journal entry will be the amount that was accrued as of the year-end date. A corresponding interest liability will be recorded in the balance sheet.
