What Is Accrue?
Let me explain what accrue means to you directly: it refers to accumulating something over time, especially in the context of interest, income, or expenses for individuals or businesses. For instance, interest in your savings account accrues steadily, increasing the total balance. This term ties closely to accrual accounting, which is the standard method most companies use today.
Key Takeaways
- Accrue is the buildup of interest, income, or expenses over time, like interest growing in a savings account.
- Financial accruals mean something builds up to be paid or received later.
- Accrue often relates to accrual accounting, involving accrued revenues and expenses.
- Accrued revenue occurs when a company sells something but hasn't been paid yet.
- Accrued expenses are costs recognized before payment, such as interest or salaries.
How Accrue Works
When a financial item accrues, it accumulates for future payment or receipt. This applies to both assets and liabilities. In finance, 'accrue' aligns with 'accrual' under GAAP and IFRS standards. An accrual is an accounting entry that tracks earned but unpaid revenues or incurred but unpaid expenses. It's the opposite of unearned entries, where the event has happened but payment hasn't. The FASB sets the rules for these mandatory accruals, covering things like accounts payable, receivable, goodwill, future taxes, and interest expenses.
Special Considerations
Accrual accounting measures a company's performance by recording economic events when they happen, not when cash moves, which builds up assets or liabilities over time and gives a clearer financial picture. This differs from cash accounting, where you only record when money is paid or received, ignoring credit-based revenue or future liabilities—no adjustments needed there. Most companies prefer accrual accounting over cash methods because it captures current finances plus future transactions for a better overall view. For example, if your company sells $100 on credit in January, you'd record it then under accrual, not wait for payment, which might delay or turn into bad debt.
Types of Accrues
All accruals split into two main types: revenue or expense accruals. Let's break them down for you.
Accrued Revenue
Accrued revenue covers income or assets, including non-cash ones, that a company has earned but not yet received. This happens when you've sold a good or service on credit, and the customer hasn't paid. Companies with lots of credit card sales often have high accounts receivable and accrued revenue. Take Company ABC hiring Consulting Firm XYZ for a three-month project at $150,000, paid at the end. While ABC owes $50,000 per milestone, the full fee accrues over the project duration, not in installments.
Accrued Expense
When a business records an expense before paying it, that's an accrued expense, entered in the ledger, shown on the balance sheet, and charged to the income statement. Common examples include interest on debt before the invoice arrives, goods or services received on credit from suppliers, or wages paid before month-end for a full month's work. You need to accrue interest, taxes, and other payments to recognize unpaid obligations in financial statements; otherwise, expenses get understated, inflating net income. Salaries accrue when workweeks don't align with monthly reports—for instance, if payroll is on January 28 but work continues to the 31st, those days count toward January expenses via an accrued salary account. Overall, accrual accounts match expenses to the period they're incurred and help predict future costs.
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