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January 30, 2009

What are accruals?

Accruals are adjustments for 1)  revenues that have been earned but are not yet recorded in the accounts, and 2) expenses that have been incurred but are not yet recorded in the accounts. The accruals need to be added via adjusting entries so that the financial statements report these amounts.

An example of an accrual for revenue involves your electric utility company. The utility used coal and many employees in December to generate electricity that customers received in December. However, the utility doesn’t bill the electric customers for the December electricity until the meters are read in January. To have the proper amounts on the utility’s financial statements, there needs to be an adjusting entry to increase revenues that were earned in December and the receivables that the utility has a right to as of December 31.

An example of an accrual involving an expense is an employee’s bonus that was earned in 2008, but will not be paid until 2009. The 2008 financial statements need to reflect the bonus expense and the bonus liability. Therefore, prior to issuing the 2008 financial statements an adjusting entry is prepared to record this accrual.

Learn more about Adjusting Entries.

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About the Author: Harold Averkamp (CPA) has worked as an accountant, consultant, and university accounting instructor for more than 25 years.

He is the author of the 2010 Master Accounting Download Package which has been praised for it's ability to simplify accounting in a way that anybody can understand.



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Comments

22 Responses to “What are accruals?”

  1. baffin on February 1st, 2009 6:21 am

    What should we do with our canceled checks that we get from the bank

  2. baffin on February 1st, 2009 6:27 am

    How long do we have to notify the irs if we switched from one accounting principal to the other (accrual to cash accounting or vice versa)

  3. chalapathi on February 4th, 2009 11:12 pm

    thank you for gave answers to our questions

  4. Raymond on February 5th, 2009 4:28 am

    Thank you for your Questions and answers. we learn a lot about accounting

  5. thomas clark on February 5th, 2009 1:16 pm

    what do we do after transaction have taken place

  6. SOPHY on February 9th, 2009 3:41 am

    thanks for your Q & A. when i was studying in college, i learned a litttle about accounting because i was not able to concentrate. through your website, i learned a lot. thanks again!!!!

  7. shah muhammad khan on February 12th, 2009 12:21 am

    how we can deffine financial accounting and cost accounting in simple words.

  8. Thuli on February 18th, 2009 4:07 am

    When having to pay the PAYE amount due to SARS, do we pay the total of all the PAYE amounts that were deducted from the employees’ salaries?

  9. rodney on February 20th, 2009 4:24 am

    what is the subsidy sales

  10. whiteegbe on February 20th, 2009 1:12 pm

    welli thanks everyone for my coopretion .i wil like to here more from u people ,meaning more questions, ilike to no more abourt accrules concept .

  11. abdullai on February 20th, 2009 2:35 pm

    I want to know the basic principles in accounting

  12. sajo on February 28th, 2009 1:54 pm

    keep it up accounting coach

  13. Alem on March 9th, 2009 3:43 am

    I found Accountingcoach more than a class-room teaching. Eversince I was informed to visit your website, I am able to get handy answers to my day-to-day problems in accounting. I would like to take this opportunity to thank yourseves and my best friend from New York.

  14. dennis on March 26th, 2009 11:34 am

    please can you send me more explanations on concepts of accounting

  15. wes on April 7th, 2009 9:00 am

    I need to teach a class on accruals to some construction folks - cost engineers, project controls, procurement, etc… Any ideas on how best to present this where it will be easy to understand for “non-accounting” folks?

    Thanks!

  16. sayyad on May 2nd, 2009 2:10 am

    hi,
    1.how we handle the accruals
    2. can i knew, how to find out the formula of balance sheet items like pur formula and cost of good sold formula creditor and debtor formula.

  17. ACoach on May 2nd, 2009 7:40 am

    We discuss accruals under our explanation of Adjusting Entries:
    http://www.accountingcoach.com/online-accounting-course/08Xpg01.html
    We also have Drills. Puzzles, and Q&A for adjusting entries (both accruals and deferrals)

  18. ALBANI T.AMIL on August 24th, 2009 9:44 pm

    goog mrning or good afternonn!pls.can u advise me what is the tecnic for accounting exam,because this coming december i have exam for accounting,thank you

  19. shenry717 on September 6th, 2009 11:16 pm

    Tom borrowed money and issued note to cover cash shortages, he will have to pay the interest that is accrued on the note. Is credit or debit?

  20. ACoach on September 7th, 2009 6:39 am

    If the accrued interest has already been recorded with a debit to Interest Expense and a credit to the liability Interest Payable, then Tom’s payment will be a debit to Interest Payable and a credit to Cash. If the accrued interest has not yet been recorded, then Tom’s payment will be a debit to Interest Expense and a credit to Cash.

  21. Tamal on November 9th, 2009 8:48 am

    Is “salary” an item of manufacturing overheard cost computation?

  22. pid on January 15th, 2010 2:36 am

    can you please feature IFRS topics? thank you

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