What is accrued revenue and expense?
Managing finances isn’t just about tracking cash—it’s about knowing what’s owed and what’s coming in, even when money hasn’t changed hands yet. Businesses deal with bills, salaries, and revenue that don’t get paid right away, which can make financial reporting tricky. That’s where “accrued” expenses and revenues come in. Accruals help companies recognize financial obligations at the right time, keeping their records accurate and compliant with accounting rules. Whether it’s an unpaid invoice or an employee’s paycheck that hasn’t been processed yet, recognizing these numbers in the books ensures a business stays on top of its finances and avoids surprises.
What does “accrued” mean?
The term “accrued” in accounting refers to income or expenses that have been earned or incurred but haven’t yet been received or paid. This concept is crucial in accrual accounting, which records financial transactions when they happen rather than when cash is exchanged.
Accruals help businesses match revenues with expenses in the correct period, giving a clearer picture of financial health. For example, if a company completes a project in December but doesn’t get paid until January, the revenue is still recognized in December’s financial statements. The same goes for expenses—if an electric bill is due for December but paid in January, the cost is still recorded in December.
Many businesses use the accrual method instead of cash accounting because it provides a more accurate representation of profits and liabilities. While cash accounting only records transactions when money moves, accrual accounting ensures financial reports reflect true earnings and obligations. This method is especially important for large companies and those that follow Generally Accepted Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS), as it ensures compliance and better financial decision-making.
Accrued revenues: Recognizing earnings before cash arrives
Accrued revenue refers to income a company has earned but hasn’t yet received. Since businesses often provide services or deliver products before getting paid, recognizing this revenue early ensures accurate financial statements.
Without accrued revenue, a business might appear less profitable than it actually is because it hasn’t received cash yet. This could mislead investors, lenders, or business owners when assessing financial performance. By recording revenue as it’s earned, companies get a clearer view of their financial position and can plan accordingly.
Common examples of accrued revenues
Interest income
A business that lends money or has investments earning interest may accumulate income before receiving payment. For example, if a company earns interest on a loan in December but the bank deposits the money in January, the interest income is accrued in December’s financial records.
Services rendered but not yet paid for
Many businesses, such as consultants, law firms, and contractors, complete work before they get paid. If a company provides services in one month but doesn’t receive payment until the next, the income must still be recorded in the correct period.
Product shipments
Some businesses ship products to customers with an agreement to receive payment later. If goods are delivered in December but payment is scheduled for January, the revenue is accrued in December’s books to reflect when it was actually earned.
How accrued revenues affect financial statements
Accrued revenues appear on the balance sheet as accounts receivable, representing money owed to the business. Once payment is received, the accounts receivable balance decreases, and cash increases. On the income statement, the revenue is recorded when it’s earned, even if the cash hasn’t been received yet.
To ensure proper recognition, businesses make adjusting journal entries at the end of each accounting period. These entries correct financial records so that revenue is recorded in the correct period, keeping the financial statements aligned with the company’s actual performance.
Accrued expenses: Recording costs before payment
Accrued expenses are costs a company has incurred but hasn’t yet paid. Businesses often receive services or use resources before making payments, and these costs need to be recorded in the correct period. Accrued expenses help businesses track liabilities accurately, ensuring that financial statements reflect what they truly owe.
Recognizing expenses when they happen—not just when cash is paid—prevents underreporting costs and overstating profits. It also ensures businesses plan for upcoming obligations rather than being caught off guard when payments come due.
Types of accrued expenses
Interest expenses
Companies that take out loans accrue interest before making payments. For example, if a business borrows money in December but the interest payment isn’t due until January, it still needs to record the accrued interest as an expense in December. This reflects the real cost of borrowing and prevents financial distortions.
Wages and salaries
Employees work before they get paid. If a company’s payroll period ends on December 31 but paychecks go out on January 5, the business still needs to recognize the wage expense in December. This ensures labor costs are matched with the revenue generated during the same period.
Taxes owed
Businesses owe various taxes, such as corporate income tax, payroll tax, and property tax, which often accrue before they are due. For example, if a company owes corporate taxes for profits earned in December but doesn’t pay until April, the tax expense still needs to be recorded in December’s financial records.
Utility bills and other periodic costs
Expenses like electricity, rent, and insurance typically accrue before payment is made. If a company uses electricity in December but receives the bill in January, the cost still belongs in December’s books to match usage with the period it was incurred.
How accrued expenses appear in financial statements
Accrued expenses are recorded as liabilities on the balance sheet under “accrued liabilities” or “accounts payable.” This represents money the business owes but hasn’t paid yet. When payment is made, the liability decreases, and cash is reduced.
On the income statement, accrued expenses are included in the relevant expense category for that period. This ensures expenses are recognized when they occur rather than when the cash is paid, keeping financial reports accurate and compliant with accounting standards.
By tracking accrued expenses properly, businesses avoid misstating profits, ensure financial transparency, and stay prepared for upcoming payments.
Accrual accounting vs. cash accounting: Key differences
Accrual and cash accounting are the two main methods businesses use to track financial transactions. The key difference is when transactions are recorded. Accrual accounting recognizes revenue when it’s earned and expenses when they’re incurred, even if cash hasn’t changed hands. Cash accounting, on the other hand, records transactions only when money is received or paid.
Accrual accounting is preferred for businesses because it provides a more accurate picture of financial health. It is also required under GAAP (Generally Accepted Accounting Principles) and IFRS (International Financial Reporting Standards) for companies that report to investors or regulators. Cash accounting is simpler and easier to manage, making it a popular choice for small businesses and freelancers. However, it can sometimes be misleading since it ignores pending revenue and expenses.
Using accrual accounting allows businesses to see their full financial picture by recognizing all earned income and incurred expenses, even if payments haven’t been made. This method ensures better financial planning, accurate profit measurement, and compliance with accounting standards. A company using cash accounting might appear profitable one month and unprofitable the next simply because payments haven’t been processed yet. Accrual accounting eliminates these fluctuations, providing a steady and realistic view of business performance.
Journal entries for accruals: How businesses record them
When a company earns money but hasn’t received payment, it records accrued revenue in its books. The journal entry for accrued revenue involves debiting accounts receivable and crediting revenue. For example, if a consulting firm provides services worth $5,000 in December but won’t receive payment until January, the entry would show accounts receivable increasing by $5,000 and revenue increasing by the same amount. When the company finally gets paid in January, the accounts receivable balance decreases, and cash increases by $5,000.
Accrued expenses must also be recorded so that financial statements reflect a business’s true liabilities. The journal entry for accrued expenses involves debiting the relevant expense account and crediting accrued liabilities. For instance, if a business owes $2,000 in wages for December but won’t pay employees until January, it records the wage expense in December and lists it as salaries payable. When payment is made in January, the salaries payable account decreases, and cash is reduced by the same amount.
At the end of each accounting period, businesses make adjusting journal entries to ensure all accrued revenues and expenses are recorded correctly. These adjustments prevent underreporting or overreporting profits and help businesses follow the matching principle, which ensures that expenses are recognized in the same period as the revenue they helped generate.
By making these adjustments, companies ensure their financial statements accurately reflect reality, which is crucial for tax filings, investor reports, and financial planning.
Why accruals are important in financial management
Accruals play a critical role in financial reporting by ensuring that businesses track income and expenses when they actually happen. Without accruals, financial statements may not accurately reflect a company’s true financial health, leading to misleading reports and poor decision-making.
The matching principle is a fundamental accounting concept that ensures expenses are recognized in the same period as the revenue they help generate. This approach prevents sudden spikes or dips in profits, provides a consistent view of business performance, and aligns with standard accounting practices required by regulators and investors. For example, a business that incurs marketing expenses in December to boost January sales should record those expenses in December’s books, even if payment is made later.
Accrual accounting also has legal and tax implications. Many businesses must recognize income before they receive payment, which affects how much tax they owe. Similarly, accrued expenses may be deducted in the period they’re incurred, reducing taxable income. Ignoring accruals could lead to inaccurate tax filings, potential penalties, or compliance issues. For companies following GAAP or IFRS, proper accrual accounting is not just a best practice—it’s a requirement.
Key takeaways
Understanding accrued revenues and expenses is essential for businesses to maintain financial accuracy and compliance. Accrual accounting ensures companies recognize earnings and costs at the right time, giving a clear and consistent financial picture.
By recording revenue when it’s earned and expenses when they’re incurred, businesses avoid misleading financial fluctuations and stay prepared for future cash flows. Whether tracking unpaid wages, pending invoices, or interest income, accruals help businesses plan ahead and avoid surprises.
For companies of all sizes, knowing how to record and manage accruals is key to long-term success. Without it, financial statements can be misleading, affecting business decisions, tax filings, and investor confidence. Mastering the concept of accrued meaning is essential for any organization aiming for financial stability and growth.
FAQs
What is the difference between accrued expenses and accounts payable?
Accrued expenses are costs that a company has incurred but hasn’t yet paid, such as wages earned by employees that haven’t been disbursed. Accounts payable, on the other hand, represent amounts a company owes to suppliers for goods or services received and invoiced. While both are liabilities, accrued expenses are typically not yet invoiced, whereas accounts payable have been billed.
How does accrued interest work?
Accrued interest is the interest that accumulates on a financial obligation, like a loan or bond, over time but hasn’t been paid yet. For example, if you hold a bond, interest accrues daily between coupon payments. When you sell the bond, the buyer compensates you for the accrued interest up to the sale date.
What are accrued liabilities?
Accrued liabilities are expenses that a company has recognized on its financial statements before paying them. These can include utilities used but not yet billed, salaries earned by employees but not yet paid, or interest on loans that has accumulated but not yet been paid.
Why is accrual accounting preferred over cash accounting?
Accrual accounting provides a more accurate picture of a company’s financial health by recording revenues and expenses when they are earned or incurred, regardless of when cash is exchanged. This method aligns with the matching principle, ensuring that income and related expenses are reported in the same period, which is essential for assessing true profitability.
Can you provide an example of accrued revenue?
Certainly! Imagine a consulting firm that completes a project in December but doesn’t receive payment until January. Under accrual accounting, the firm would record the revenue in December when the service was provided, even though the cash is received later.
