Introduction
Accrue refers to an accumulation of benefits or making a provision for expense or charge. The process of accrual occurs usually at the end of a financial period, such as at the end of a financial year. Incomes typically include interest which a person gets entitlement; however, the income is not yet received. The expense is due but not yet paid.
Understanding Accrue
Accrue is a term in accounting to bring into account unpaid expenses and receipts. The revenues from the sale of a product accrue though it is yet to be received. The amount is typically due for receipt in the next accounting period. Accrued expenses are those which are due for goods or services purchased during the accounting period.
An accrual typically results in an asset or a liability for an organisation. Accrual of a receipt creates an asset and accrual of liability creates a liability. The asset and liability is generally a current asset or current liability. In most countries, the accounting standards of the country require an accounting of accrual of all assets and liabilities.
An accrual is also an adjustment entry in terms of accounting. However, accrual of expense and revenue is recognised by accounting standards both Indian and international accounting standards. Accruals include accounts receivable, annual income tax dues, accounts payable, rent dues, and interest costs.
Accrual helps in keeping an account and track of revenues and expenses. It presents a true and fair picture of the profits and losses of an organisation. An internal and external auditor also carries out their audit as per the accrual method of accounting and the applicable accounting standards. The accruals are verified with the underlying invoices and other documentation.
Conclusion
The system of accruing income and expenses facilitates measurement of the operational performance and calculation of the tax liability. An organisation can accordingly make its accounts, namely the profit and loss statement and the balance sheet.
Thus, an organisation can measure its growth year on year and growth in its capital or reserves. The accrual method is in contrast to the cash method of accounting. However, legal regulations generally require an accrual method for larger organisations.
