Accruals

Accruals are adjustments for revenues that have been earned and expenses that have been incurred, but for which cash has not yet been exchanged. They are a fundamental concept of accrual basis accounting, which records economic events in the period they occur rather than when payment is made or received. This method provides a more accurate picture of a company's financial performance than cash basis accounting.

Accruals are recorded via a journal entry during the month-end close process. Common examples of accrued expenses include wages earned by employees but not yet paid, or interest expense incurred but not yet due. Accrued revenues could include interest income earned but not yet received. These adjustments ensure that financial statements, such as the Profit and Loss Statement (P&L) and Balance Sheet, correctly match revenues to the expenses incurred to generate them within a specific accounting period.