Accrue Meaning

An accrual is a recognition of income, interest, or expenses that have been earned or incurred but not yet settled in cash. It represents the accumulated amount to be received or paid, recorded under the accrual accounting method to ensure revenues and expenses are matched to the period in which the underlying economic activity occurs. For example, if a business delivers goods or services to a customer in December but receives payment in February, the revenue is accrued in December.

The company records a sale and sets up a trade receivable asset for the amount owed. When payment is eventually received, the receivable is reduced and the cash or bank balance increases.

Accruals can be assets or liabilities:

• Accrued assets (such as accrued income or interest receivable) arise when the business has earned a benefit but has not yet received payment.
• Accrued liabilities (such as accrued expenses, wages payable, or rent payable) arise when the business has received a good or service but has not yet paid for it. These are typically recorded in trade payables or specific accrued expense accounts.

When a transaction is accrued, it appears both on the balance sheet (as an asset or liability) and in the income statement (as revenue or expense).

The balance sheet entry is reversed or written off once the actual cash flow occurs. This mechanism is central to the accrual basis of accounting and ensures financial statements reflect economic reality rather than just cash movements.