Accruals Simplified: Making Sense of Financial Timing

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Accruals are a fundamental concept in financial reporting, aiming to accurately reflect a company’s financial position and performance by recording transactions when they occur, regardless of when cash is exchanged. Let’s explore accruals in more detail with examples:


Revenue Accruals

Example: A construction company completes a project in December but invoices the client in January.

Even though the cash is received in January, the revenue is recognized in December when the project was completed.

This ensures that the company’s financial statements reflect its performance during the period when the service was provided.

Expense Accruals

Example: A manufacturing company receives a utility bill for December at the end of the month but pays it in January.

To accurately match expenses with the revenue they help generate, the company accrues the utility expense in December, even though the payment is made later.

Interest Accruals

Example: A bank accrues interest income on loans made to customers based on the outstanding loan balances, regardless of when the interest payments are received.

This ensures that the bank’s financial statements reflect the interest income earned during the period in which the loans were outstanding.

Wages and Bonuses Accruals

Example: A software company’s employees work through the end of December, but their payroll is processed in January.

To accurately reflect the cost of labor for December, the company accrues wages and bonuses in December, even though the actual payments are made in January.

Inventory Purchases Accruals

Example: A retail store purchases inventory on credit at the end of the accounting period, but doesn’t make the payment until the next period.

To properly match expenses with revenues, the cost of the inventory is accrued in the current period, ensuring that the cost of goods sold is accurately recorded.

Taxes Accruals

Example: A corporation accrues income taxes based on its estimated tax liability for the current accounting period, even though the actual tax payment may be due in the next period.

This ensures that the company’s financial statements reflect its tax obligation for the period in which the income was earned.


Accrual accounting provides a more accurate representation of a company’s financial position and performance compared to cash basis accounting.

By recognizing revenues and expenses when they are incurred, accrual accounting helps stakeholders make informed decisions based on the economic reality of transactions, rather than the timing of cash flows.

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