What is an accrual?
Published Monday 19 October 2026
Table of contents
Accruals are amounts of money that you know will come or go from the business.
Key takeaways
- Accruals record income and expenses when they're earned or incurred, not when cash changes hands, giving you a more accurate picture of your finances.
- The two main types are accrued expenses (costs you owe but haven't paid) and accrued revenue (money you've earned but haven't received).
- Whether accrual accounting is required depends on your country, business structure and size, but International Financial Reporting Standards (IFRS) use the accrual basis.
- Recording accruals involves simple journal entries that adjust your accounts at the end of each reporting period.
What are accruals?
Understanding accruals is one of the building blocks of accurate financial reporting for your business.
Accruals are adjustments you make to your accounts to recognise income or expenses at the time they occur, rather than when the money actually arrives or leaves your bank account. They're a core part of accrual accounting. They capture the gap between when a transaction happens and when the cash moves.
For example, if you provide consulting services to a client in March but don't receive payment until April, an accrual lets you record that revenue in March, when you actually earned it. This gives you a clearer, more realistic view of how your business is performing at any given time.
How do accruals work?
Accruals bridge the timing gap between business activity and cash flow, so your financial reports reflect what's actually happening.
Here's a simple way to think about it. Your business receives an electricity bill on 31 March for $500 (an illustrative amount in USD), but payment isn't due until 15 April. Without an accrual, your March financial statements wouldn't show that $500 expense, even though you used the electricity in March.
By recording an accrual, you add the $500 expense to your March accounts. When you pay the bill in April, you reverse the accrual and record the payment. This means each month's financials accurately reflect the costs and revenue that belong to that period.
Accruals are typically recorded at the end of an accounting period (monthly, quarterly, or annually) through journal entries, then reversed when the actual transaction settles.
Types of accruals
Accruals fall into two main categories, depending on whether you owe money or are owed money.
Accrued expenses
These are costs your business has incurred but hasn't paid yet.
Accrued expenses show up as liabilities on your balance sheet because they represent money you owe. Common examples include employee wages earned but not yet paid, utility bills received but not yet due, and interest on a loan that's been building up but isn't payable until next month.
Accrued revenue
This is income your business has earned but hasn't received payment for yet.
Accrued revenue appears as an asset on your balance sheet because it represents money owed to you. For instance, if you complete a landscaping job in March but don't invoice the client until April, the revenue belongs in March. Recording it as accrued revenue keeps your March financials accurate.
How to record accruals
Recording accruals involves journal entries that adjust your accounts at the end of a reporting period. Here's how to handle each type.
To record an accrued expense, follow these steps:
- Debit the relevant expense account (for example, utilities expense) to recognise the cost.
- Credit the accrued liabilities account to show that you owe the amount.
- When you pay the bill, reverse the entry: debit the accrued liabilities account and credit your bank account.
To record accrued revenue, follow these steps:
- Debit the accrued revenue (or accounts receivable) account to recognise the income.
- Credit the relevant revenue account to reflect the earnings.
- When you receive payment, reverse the entry: debit your bank account and credit the accrued revenue account.
Accounting software like Xero can simplify this process by automating journal entries and keeping your records up to date without manual data entry.
Accrual accounting vs cash accounting
Choosing between accrual and cash accounting affects how and when you recognise income and expenses. Here's how they compare.
Accrual accounting:
- Records income and expenses when they're earned or incurred, regardless of when cash moves.
- Gives a more accurate picture of your financial position at any point in time.
- Required in many cases by financial reporting standards or tax rules, depending on the country.
- Better suited to businesses that invoice clients or carry inventory.
Cash accounting:
- Records income and expenses only when cash is received or paid.
- Simpler to manage, especially for very small businesses with straightforward transactions.
- Often allowed for smaller or unincorporated businesses, though the rules vary by country.
- Can give a misleading picture if you have outstanding invoices or unpaid bills.
For most growing small businesses, accrual accounting provides better visibility into your true financial health, even though it takes a bit more effort to maintain.
Examples of accruals
Seeing accruals in everyday business scenarios can make the concept easier to grasp. Here are some common situations small businesses encounter.
- Utility bills: your business uses electricity throughout March, but the bill arrives in April. You record the expense in March as an accrual so your March profit and loss report is accurate.
- Employee wages: your team works the last week of the month, but payday falls in the following month. Accruing those wages ensures your labour costs appear in the correct period.
- Revenue earned but not yet invoiced: you finish a project for a client in March but don't send the invoice until April. An accrual captures that revenue in March, when the work was done.
- Sales tax or value-added tax (VAT) collected but not yet paid to the tax authority: you collect tax from customers throughout the period, but you pay it later. Recording the tax liability as an accrual keeps your reporting aligned, though tax names and deadlines vary by country.
- Interest on a business loan: interest accumulates daily on your loan, but you only make payments monthly. Accruing the interest ensures each month's expenses are complete.
Benefits of accrual accounting for small businesses
Accrual accounting takes a little more effort than cash accounting, but the payoff is worth it for most small businesses.
- Accurate financial picture: your profit and loss statement reflects what's actually happening in your business, not just what's in your bank account today.
- Better decision-making: with a complete view of income and expenses, you can make more confident choices about hiring, investing, and managing cash flow.
- Compliance readiness: if your business grows, incorporates or seeks investment, you may need accrual-based records. Having them in place already makes that step easier.
- Lender and investor confidence: lenders and investors may ask for accrual-based financial statements because they show money owed to and by your business.
- Easier period-to-period comparison: matching revenue and expenses to the correct periods makes it simpler to spot trends and measure performance over time.
When is accrual accounting required?
The rules around when accrual accounting is required vary by country, business structure and size. Financial reporting standards and tax rules are set separately, so it helps to look at both.
IFRS Accounting Standards require financial statements to use the accrual basis, except for cash flow information (currently set out in IAS 1). For annual periods beginning on or after 1 January 2027, IFRS 18 replaces IAS 1, and the accrual basis requirement moves to IAS 8 paragraph 6M. The IFRS for SMEs Accounting Standard sets the same rule in paragraph 3.16A, and each jurisdiction decides which businesses must apply these standards.
Tax rules differ again. In the United States, federal tax law generally bars C corporations and partnerships with a C corporation partner from using the cash method, unless they meet a gross receipts test. For tax years beginning in 2026, the limit is $32 million, averaged over the previous three tax years (Internal Revenue Service (IRS) Revenue Procedure 2025-32).
The US threshold is inflation-adjusted each year, and it was $31 million for 2025, according to Internal Revenue Bulletin 2025-38. Check the latest IRS guidance for the year you're filing.
Since 6 April 2024, the UK cash basis has been the default for sole traders and partnerships without corporate partners filing Self Assessment. Limited companies and limited liability partnerships (LLPs) can't use the cash basis.
Even if your business isn't required to use accrual accounting, adopting it early can save you time in the long run. As your business grows, switching from cash to accrual accounting becomes more complex. Starting with accrual-based records gives you a smoother path to compliance and better financial visibility from the outset.
Rules change and vary by location, so check with a local accountant or advisor about what applies to your business.
Keep your accruals on track with Xero
Managing accruals doesn't have to mean extra admin. With Xero's accounting software, you can automate journal entries, reconcile transactions daily, and pull up accurate financial reports whenever you need them.
Whether you're tracking accrued expenses, monitoring outstanding invoices, or preparing your tax returns, Xero keeps everything in one place so you can spend less time on the books and more time running your business. Get one month free.
FAQs on accruals
Here are some frequently asked questions about accruals.
What is the difference between accruals and prepayments?
Accruals recognise expenses or revenue that have occurred but haven't been paid or received yet. Prepayments are the opposite: they record payments you've made in advance for goods or services you haven't received yet, such as paying rent for the next quarter.
Do all businesses need to use accrual accounting?
Not necessarily: it depends on your country, business structure and size. Where cash accounting is allowed, accrual accounting is still recommended for a clearer financial picture.
How do accruals affect financial statements?
Accrued expenses increase your liabilities and reduce your profit for the period, while accrued revenue increases your assets and boosts reported income. Both adjustments ensure your financial statements match the period in which the activity actually occurred.
What is the difference between accruals and accounts payable?
Accounts payable are amounts you owe for goods or services where you've already received an invoice. Accruals cover expenses you've incurred but haven't been billed for yet, such as wages earned by employees before payday.
Related terms
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Disclaimer
This glossary is for small business owners. The definitions are written with their requirements in mind. More detailed definitions can be found in accounting textbooks or from an accounting professional. Xero does not provide accounting, tax, business or legal advice.