Accruals is an accounting term that refers to the revenues which are earned and the expenses that are incurred both of which may lead to an impact on the income statement. Accruals are the adjustments that should be made before the issuing of any particular company’s financial statement. Accruals affect the balances sheet where the liabilities and non cash based assets are represented which is further used in accountings that are accruals based. These accounts can be accounts payable or receivables, future tax liabilities, goodwill or future interest expenses.
Also the accruals involves different types of business transaction which can be as follows-
- Liabilities, expenses and losses- these are those which may have been incurred but have not been recorded yet in the accounts.
- Revenues and assets- these are those that are already earned but still they are yet to be recorded in the accounts.
During an accounting period when there are no invoices or payment which have been received or made, then the revenues and expenses which are incurred are called the accruals. Thus these are those figures which are precisely estimated once they are received and may have different values. And after the invoice or the payment is received the company makes a proper record of the amount in the account payable of the balance sheet.
The importance of accruals
Now in recent times, it has been observed that these accrual accounts have been greatly used and their popularity has been increasing ever so. It has increased the amount of information that is related to the accounting statements. Now before accruals were in trend, accruals only could record cash transactions which did not give any information about other business activities which were equally important. But after people starting using accruals, companies were able to measure what they owe in the short term tenure and also what they accept to receive in terms of cash revenues. Through accruals the companies are allowed to short their assets which do not carry any cash value for example goodwill.
Generally accountants use the method of accruals to make certain adjustments to the revenues which have been earned and are still to be recorded in the accounts. They are also able to evaluate the expenses that have already been incurred but have still not made it to the account records. One can add these accruals through journal entries simply by adjusting them so that the amounts can be reported in the final financial statements. Now in the case of double entry book keeping, the offset of an accrued expense is basically the liability account which is accrued and appears in the balance sheet. In this way the balance sheet and the income statements are impacted by the accrual entry.
So basically the accruals are something which is related to both arrears and the prepayments and depict all the revenues and expenses that have been incurred and earned and still to be recorded in the accounts book. Thus accruals are those liabilities or the non cash based assets that belong to the balance sheet accounts.