Accrue: Definition, How It Works, and 2 Main Types of Accruals

Accrual is a term used in accounting to describe the process of recording revenue or expenses that have been incurred but have not yet been received or paid. This is in contrast to cash basis accounting, which only records transactions when cash is actually exchanged.

There are two main types of accruals:

Deferred revenue: This occurs when a company receives payment for goods or services that will be provided in the future. For example, a company might receive a deposit for a product that will be delivered in 6 months. The company would record the deposit as deferred revenue and then recognize the revenue when the product is delivered.
Accrued expenses: This occurs when a company incurs an expense but has not yet paid for it. For example, a company might have employees who work 40 hours per week but are paid on a biweekly basis. The company would record the wages as an accrued expense and then pay the employees when they are paid.

Accruals are important because they help to ensure that a company's financial statements accurately reflect its financial position. By recording transactions when they occur, accruals help to prevent a company from overstating its profits or understating its liabilities.

Here is a more detailed explanation of how accruals work:

Deferred revenue: When a company receives payment for goods or services that will be provided in the future, it records the deposit as a liability. This liability is called deferred revenue. The company then recognizes the revenue when the goods or services are provided.
Accrued expenses: When a company incurs an expense but has not yet paid for it, it records the expense as an asset. This asset is called an accrued expense. The company then pays the expense when it is due.