Accrual
Encyclopedia
Accrual of something is, in finance
, the adding together of interest
or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet
that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable
, accounts receivable
, goodwill
, deferred tax
liability and future interest expense.
For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue
in its current income statement
still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period
. The proceeds are also an accrued income (asset) on the balance sheet
for the delivery fiscal year, but not for the next fiscal year when cash is received.
Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense
in its current income statement, even though s-/he will actually get paid at the end of the following week in the next accounting period
. The commission is also an accrued expense (liability) on the balance sheet
for the delivery period, but not for the next period the commission (cash) is paid out to her/him.
Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic / accounting characteristics.
Accrued revenue (or accrued assets) is an asset
, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related revenue
item is recognized, while cash is to be received in a latter period, when the amount is deducted from accrued revenues.
In the rental industry, there are specialized revenue accruals
for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date. For example a rental contract which began on 15 January, being invoiced on a recurring monthly basis will not generate its first invoice until 14 February. Therefore at the end of the January financial period an accrual must be raised for 16 days worth of the monthly charge. This may be a simple pro-rata basis (e.g. 16/31 of the monthly charge) or may be more complex if only week days are being charged or a standardized month is being used (e.g. 28 days, 30 days etc.).
Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision
. An example is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period
when the amount is deducted from accrued expenses.
In the United States of America, this difference is best summarized by IAS 37 which states:
"11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
"(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
"(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
"Accruals are often reported as part of trade and other payables, whereas provisions are reported separately."
To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectable.
, a common benefit that an employer will provide for employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick or vacation
time and this time is placed into a bank
. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.
is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time.
Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).
Finance
"Finance" is often defined simply as the management of money or “funds” management Modern finance, however, is a family of business activity that includes the origination, marketing, and management of cash and money surrogates through a variety of capital accounts, instruments, and markets created...
, the adding together of interest
Interest
Interest is a fee paid by a borrower of assets to the owner as a form of compensation for the use of the assets. It is most commonly the price paid for the use of borrowed money, or money earned by deposited funds....
or different investments over a period of time. It holds specific meanings in accounting, where it can refer to accounts on a balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
that represent liabilities and non-cash-based assets used in accrual-based accounting. These types of accounts include, among others, accounts payable
Accounts payable
Accounts payable is a file or account sub-ledger that records amounts that a person or company owes to suppliers, but has not paid yet , sometimes referred as trade payables. When an invoice is received, it is added to the file, and then removed when it is paid...
, accounts receivable
Accounts receivable
Accounts receivable also known as Debtors, is money owed to a business by its clients and shown on its Balance Sheet as an asset...
, goodwill
Goodwill (accounting)
Goodwill is an accounting concept meaning the value of an entity over and above the value of its assets. The term was originally used in accounting to express the intangible but quantifiable "prudent value" of an ongoing business beyond its assets, resulting perhaps because the reputation the firm...
, deferred tax
Deferred tax
Deferred tax is an accounting concept , meaning a future tax liability or asset, resulting from temporary differences or timing differences between the accounting value of assets and liabilities and their value for tax purposes.- Temporary differences :Temporary differences are differences between...
liability and future interest expense.
For example, a company delivers a product to a customer who will pay for it 30 days later in the next fiscal year, which starts a week after the delivery. The company recognizes the proceeds as a revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
in its current income statement
Income statement
Income statement is a company's financial statement that indicates how the revenue Income statement (also referred to as profit and loss statement (P&L), statement of financial performance, earnings statement, operating statement or statement of operations) is a company's financial statement that...
still for the fiscal year of the delivery, even though it will get paid in cash during the following accounting period
Accounting period
An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...
. The proceeds are also an accrued income (asset) on the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
for the delivery fiscal year, but not for the next fiscal year when cash is received.
Similarly, a salesperson, who sold the product, earned a commission at the moment of sale (or delivery). The company will recognize the commission as an expense
Expense
In common usage, an expense or expenditure is an outflow of money to another person or group to pay for an item or service, or for a category of costs. For a tenant, rent is an expense. For students or parents, tuition is an expense. Buying food, clothing, furniture or an automobile is often...
in its current income statement, even though s-/he will actually get paid at the end of the following week in the next accounting period
Accounting period
An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...
. The commission is also an accrued expense (liability) on the balance sheet
Balance sheet
In financial accounting, a balance sheet or statement of financial position is a summary of the financial balances of a sole proprietorship, a business partnership or a company. Assets, liabilities and ownership equity are listed as of a specific date, such as the end of its financial year. A...
for the delivery period, but not for the next period the commission (cash) is paid out to her/him.
Unfortunately, the term accrual is also often used as an abbreviation for the terms accrued expense and accrued revenue that share the common name word, but they have the opposite economic / accounting characteristics.
- Accrued revenue: Revenue is recognized before cash is received.
- Accrued expense: Expense is recognized before cash is paid out.
Accrued revenue (or accrued assets) is an asset
Asset
In financial accounting, assets are economic resources. Anything tangible or intangible that is capable of being owned or controlled to produce value and that is held to have positive economic value is considered an asset...
, such as unpaid proceeds from a delivery of goods or services, when such income is earned and a related revenue
Revenue
In business, revenue is income that a company receives from its normal business activities, usually from the sale of goods and services to customers. In many countries, such as the United Kingdom, revenue is referred to as turnover....
item is recognized, while cash is to be received in a latter period, when the amount is deducted from accrued revenues.
In the rental industry, there are specialized revenue accruals
Rental management software
The rental industry spans many different types of equipment from tools to heavy construction equipment, aerial to vehicles, party and event to computers and test and measurement equipment and highly specialized areas such as Crane and Temporary Accommodation rental...
for rental income which crosses month end boundaries. These are normally utilized by rental companies who charge in arrears, based on an anniversary of a contract date. For example a rental contract which began on 15 January, being invoiced on a recurring monthly basis will not generate its first invoice until 14 February. Therefore at the end of the January financial period an accrual must be raised for 16 days worth of the monthly charge. This may be a simple pro-rata basis (e.g. 16/31 of the monthly charge) or may be more complex if only week days are being charged or a standardized month is being used (e.g. 28 days, 30 days etc.).
Accrued expense, in contrast, is a liability with an uncertain timing or amount, but where the uncertainty is not significant enough to qualify it as a provision
Provision (accounting)
In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP, provision means an expense, while in IFRS, International Financial Reporting Standards, it means a liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense,...
. An example is a pending obligation to pay for goods or services received from a counterpart, while cash is to be paid out in a latter accounting period
Accounting period
An accounting period is a period with reference to which United Kingdom corporation tax is charged. It helps dictate when tax is paid on income and gains...
when the amount is deducted from accrued expenses.
In the United States of America, this difference is best summarized by IAS 37 which states:
"11 Provisions can be distinguished from other liabilities such as trade payables and accruals because there is uncertainty about the timing or amount of the future expenditure required in settlement. By contrast:
"(a) trade payables are liabilities to pay for goods or services that have been received or supplied and have been invoiced or formally agreed with the supplier; and
"(b) accruals are liabilities to pay for goods or services that have been received or supplied but have not been paid, invoiced or formally agreed with the supplier, including amounts due to employees (for example, amounts relating to accrued vacation pay). Although it is sometimes necessary to estimate the amount or timing of accruals, the uncertainty is generally much less than for provisions.
"Accruals are often reported as part of trade and other payables, whereas provisions are reported separately."
To add to the confusion, some legalistic accounting systems take a simplistic view of “’accrued revenue”’ and “’accrued expenses”’, defining each as revenue / expense that has not been formally invoiced. This is primarily due to tax considerations, since the act of issuing an invoice creates, in some countries, taxable revenue, even if the customer does not ultimately pay and the related receivable becomes uncollectable.
Accruals in payroll
In payrollPayroll
In a company, payroll is the sum of all financial records of salaries for an employee, wages, bonuses and deductions. In accounting, payroll refers to the amount paid to employees for services they provided during a certain period of time. Payroll plays a major role in a company for several reasons...
, a common benefit that an employer will provide for employees is a vacation or sick accrual. This means that as time passes, an employee accumulates additional sick or vacation
Annual leave
Annual leave is paid time off work granted by employers to employees to be used for whatever the employee wishes. Depending on the employer's policies, differing number of days may be offered, and the employee may be required to give a certain amount of advance notice, may have to coordinate with...
time and this time is placed into a bank
Bank
A bank is a financial institution that serves as a financial intermediary. The term "bank" may refer to one of several related types of entities:...
. Once the time is accumulated, the employer or the employer's payroll provider will track the amount of time used for sick or vacation.
Length of service
For most employers, a time-off policyPolicy
A policy is typically described as a principle or rule to guide decisions and achieve rational outcome. The term is not normally used to denote what is actually done, this is normally referred to as either procedure or protocol...
is published and followed with regard to benefit accruals. These guidelines ensure that all employees are treated fairly with regard to the distribution and use of sick and vacation time.
Within these guidelines, the rate at which the employee will accumulate the vacation or sick time is often determined by length of service (the amount of time the employee has worked for the employers).
Trial period
In many cases, these guidelines indicate there is a trial period (usually 30 to 90 days) where no time is awarded to the employee. This does not prevent an employee from calling in sick immediately after being hired, but it does mean that they will not get paid for this time off. However it does prevent an employee for example, scheduling a vacation for the second week of work. After this trial period, the award of time may begin or it may be retroactive, back to the date of hire.Rollover/carry over
Some accrual policies have the ability to carry over or roll over some or all unused time that has been accrued into the next year. If the accrual policy does not have any type of rollover, any accrued time that is in the bank is usually lost at the end of the employer's calendar year.See also
- Accrued income
- Accrued interestAccrued interestIn finance, accrued Interest is the interest that has accumulated since the principal investment, or since the previous interest payment if there has been one already. For a financial instrument such as a bond, interest is calculated and paid in set intervals...
- Accrued jurisdictionAccrued jurisdictionAccrued jurisdiction within the context of the Australian legal system is the power held over state matters by federal courts. Accrued jurisdiction will occur when there are several cases brought to the Federal Court of Australia where there are competing jurisdictions between them...
- Accrued liabilitiesAccrued liabilitiesAccrued liabilities are liabilities which have occurred, but have not been paid or logged under accounts payable during an accounting period; in other words, obligations for goods and services provided to a company for which invoices have not yet been received...
- Revenue recognitionRevenue recognitionThe revenue recognition principle is a cornerstone of accrual accounting together with matching principle. They both determine the accounting period, in which revenues and expenses are recognized...
- Matching principleMatching principleThe matching principle is a culmination of accrual accounting and the revenue recognition principle. They both determine the accounting period, in which revenues and expenses are recognized. According to the principle, expenses are recognized when obligations are incurred The matching principle...
- Accrual basis accounting
- DeferralDeferralDeferred, in accrual accounting, is any account where the asset or liability is not realized until a future date , e.g. annuities, charges, taxes, income, etc. The deferred item may be carried, dependent on type of deferral, as either an asset or liability...
s in accounting
External links
- http://blog-pfm.imf.org/pfmblog/files/fad_guidance_note_transition_to_accrual.pdfTransition to Accrual Accounting — International Monetary FundInternational Monetary FundThe International Monetary Fund is an organization of 187 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world...
Technical Guidance Note] - Accrual Accounting at Investopedia.comInvestopedia.comInvestopedia is one of the Internet's largest sites devoted entirely to investing education. The site was started by Cory Janssen and Cory Wagner in June 1999 at the height of the internet stock boom as an unbiased source to learn about investing. Based in the city of Edmonton in Alberta, Canada,...