Accruals are revenues earned or expenses incurred which impact a company’s net income on the income statement, although cash related to the transaction has not yet changed hands. Accruals also affect the balance sheet, as they involve non-cash assets and liabilities. Accrual accounts include, among many others, accounts payable, accounts recieveable, accrued tax liabilities, and accrued interest earned or payable.
- Accruals are needed for any revenue earned or expense incurred, for which cash has not yet been exchanged.
- Accruals improve the quality of information on financial statements by adding useful information about short-term credit extended to customers and upcoming liabilities owed to lenders.
- Accruals and deferrals are the basis of the accrual method of accounting.
- Accruals are created via adjusting journal entries at the end of each accounting period.
Accruals and deferrals are the basis of the accrual method of accounting, the preferred method by Generally accepted accounting principles (GAAP).1 Using the accrual method, an accountant makes adjustments for revenue that has been earned but is not yet recorded in the general ledger and expenses that have been incurred but are also not yet recorded. The accruals are made via adjusting general entries at the end of each accounting period, so the reported financial statements can be inclusive of these amounts.