What Is the Accrual Basis? When Is It Applied?

What does accrual mean?

Accrual refers to recording an income or expense in the accounting records at the moment it economically occurs, regardless of whether the payment has been made or received. This approach ensures that revenues and expenses are matched with the correct accounting period and is directly related to the principle of periodicity.

For example, if a business receives a service but the invoice has not yet been issued, an expense accrual is recorded. Similarly, if a business completes a service but has not yet collected the payment, revenue accrual arises. Accrual accounting focuses on economic activities rather than cash movements.

What is the accrual basis?

The accrual basis is an accounting principle that requires revenues and expenses to be recorded in the period to which they belong, independent of payment dates. This method allows financial statements to present a more accurate and reliable picture of a company’s financial performance.

Income may be collected in a different month than when it is earned, and expenses may be paid later than when they occur. Accrual accounting ensures that profitability analysis is based on actual economic performance rather than cash flow timing.

What does the accrual basis mean in accounting?

In accounting, the accrual basis means recognizing revenues when they are earned and expenses when they are incurred. Whether the payment or collection happens later does not affect the accuracy of financial data.

For instance, if a company provides a service in December but receives payment in January, the revenue is accrued in December. Likewise, electricity expenses incurred in December but paid in January must be recorded as December expenses. This approach ensures that financial statements reflect the company’s true financial position.

What is accrual-based accounting?

Accrual-based accounting is a system in which revenues and expenses are recorded in the period they occur. Within this system, the following accounts are commonly used:

181 Accrued Revenues
381 Accrued Expenses

These accounts allow businesses to track future receivables and unpaid expenses in an organized manner. Accrual-based accounting plays a critical role in accurately presenting a company’s financial performance, especially for small and medium-sized enterprises.

When is accrual recorded?

Accrual is recorded at the moment an economic transaction occurs, not when payment is made. Expense accruals are recorded when the expense arises, and revenue accruals are recorded when the service or product is delivered.

Examples include:

Electricity consumed in December is recorded as a December expense even if the invoice is issued in January.
If a service is completed in December, revenue is accrued in December even if the customer pays in January.

This method improves both financial accuracy and effective management of receivables and payables.

Which financial statements are prepared under the accrual basis?

The accrual basis ensures the accurate preparation of key financial statements, including:

Income statement
Balance sheet
Cash flow statement
Statement of changes in equity

Proper classification of accrued revenues and expenses ensures these statements reflect the true financial condition of the business.

What is the difference between accrual and collection?

Accrual and collection are often confused, but they represent different concepts. Accrual refers to recognizing income or expenses when they are economically realized, whereas collection refers to receiving the actual payment.

Revenue is first accrued and later collected; expenses are first accrued and later paid. While the cash basis focuses solely on cash inflows and outflows, the accrual basis considers the economic substance of transactions, making it a more comprehensive and accurate accounting method.

What is an accrued liability?

An accrued liability represents expenses that have been incurred during a period but have not yet been paid. These liabilities are shown under short-term liabilities on the balance sheet and are typically tracked using the 381 Accrued Expenses account.

Common examples include electricity, rent, interest, and utility expenses. Even though payment occurs later, these costs must be recorded in the correct accounting period.

What are accrued expenses?

Accrued expenses are costs that belong to a specific period but have not yet been paid or invoiced. For example, even if an electricity bill has not been received by month-end, the related expense must still be accrued.

Recording accrued expenses ensures consistency between the income statement and balance sheet and improves the reliability of accounting records.

What are accrued revenues?

Accrued revenues represent income that has been earned but not yet collected. Delivered products or completed services are recorded as revenue in the relevant period, regardless of payment timing.

This practice prevents misrepresentation of a company’s actual revenue performance and ensures accurate period-based analysis.

What is an accrual entry?

An accrual entry is the accounting record made to recognize income or expenses in the period they occur, independent of payment dates. In expense accruals, the relevant expense account is debited while accrued expenses are credited. In revenue accruals, accrued revenues are debited and the revenue account is credited.

These entries are essential for preparing accurate period-end financial statements.

What is the accrual amount?

The accrual amount is the portion of income or expense that must be recognized in a specific accounting period. Payment timing is irrelevant; only the period in which the economic activity occurred is considered.

Accrual amounts improve financial transparency, support better cash flow planning, and help businesses manage their receivables and liabilities more effectively.