As accounting software providers, we’re often asked tricky accountancy questions.
This has inspired us to create a new regular blog series, where we’ll answer some of the most commonly asked questions we receive, as a way to help our customers understand accounting jargon.
What are accruals?
An accrual is a way for businesses to track expenses or revenues that haven’t been accounted for yet, when they are incurred, even if money wasn’t exchanged.
What is accrual accounting?
If a business uses accrual accounting, it records revenue when the transaction is completed and not when it receives the cash. In simple terms — the company records revenue when it earns it, even if the customer hasn’t paid for it yet.
To give you an everyday example of this — an accountant who uses accrual accounting, records the revenue earned when the job is completed, even if the client hasn’t paid the final bill yet. Another example is, if your business makes a sale and carries out the work to realise the sale in April, but receives the money in May, accrual accounting means that your company will recognise that sale in their accounts in April as that was when the invoice was created.
However, there are several accounting adjustments you need to make to ensure you correctly follow the accruals accounting concept.
The same principle applies for expenses, accrued expenses refer to expenses that have already been incurred, but haven’t been paid yet.
In business terms, a company will record any expenses when they’re incurred, even if the company hasn’t paid for the supplies yet. For example — your accountant may only bill you after your financial year when they have finished your accounts. However, as the cost of your accountant relates to the financial year, this cost should be accrued before the year ends.
What are the benefits of accrual accounting?
- It helps businesses to keep an accurate summary of their financial activity over a particular period.
- It is an effective way for businesses to predict what they might see on their future expense reports.
If you need an accountant, find one in your local area with Find UK Accountant, or check out our helpful support guides to find out more about processing accruals using our online accounting software.