What are accruals in accounting?

Published Thursday 23 July 2026

Table of contents

• What are accruals?
• How do accruals work?
• Types of accruals
• How to record accruals
• Accrual accounting vs cash accounting
• Examples of accruals
• Benefits of accrual accounting for small businesses
• Accruals in Australia
• Keep your accruals on track with Xero
• FAQs on accruals

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 2 main types are accrued expenses (costs you owe but haven't paid) and accrued revenue (money you've earned but haven't received).
• Australian businesses with a GST turnover of $10 million or more must use accrual accounting for GST reporting purposes.
• 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 June but don't receive payment until July, an accrual lets you record that revenue in June, 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 30 June for $500, but payment isn't due until 15 July. Without an accrual, your June financial statements wouldn't show that $500 expense, even though you used the electricity in June.

By recording an accrual, you add the $500 expense to your June accounts. When you pay the bill in July, 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 2 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:

1. Debit the relevant expense account (for example, utilities expense) to recognise the cost.
2. Credit the accrued liabilities account to show that you owe the amount.
3. 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:

1. Debit the accrued revenue (or accounts receivable) account to recognise the income.
2. Credit the relevant revenue account to reflect the earnings.
3. 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 for Australian businesses with a GST turnover of $10 million or more.
• 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.
• Available to Australian businesses with a GST turnover under $10 million as an option for GST reporting.
• 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 Australian small businesses encounter.

• Utility bills: your business uses electricity throughout June, but the bill arrives in July. You record the expense in June as an accrual so your June 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.
• GST collected but not yet submitted: you collect Goods and Services Tax (GST) from customers throughout the quarter, but the Business Activity Statement (BAS) isn't due until the following month. Recording the GST liability as an accrual keeps your reporting aligned.
• 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 GST turnover grows past $10 million, you'll already have accrual-based records in place for GST reporting.
• Lender and investor confidence: banks and investors prefer accrual-based financial statements because they show the full financial story.
• Easier period-to-period comparison: matching revenue and expenses to the correct periods makes it simpler to spot trends and measure performance over time.

Accruals in Australia

If you run a business in Australia, there are specific rules around when accrual accounting is required.

The Australian Taxation Office (ATO) requires businesses with a GST turnover of $10 million or more to use the non-cash (accrual) basis when reporting GST on their Business Activity Statement (BAS). Businesses with a GST turnover under that threshold can choose between accrual and cash accounting for GST purposes.

Beyond GST, the Australian Accounting Standards Board (AASB) sets the financial reporting standards that apply to Australian businesses. If your business prepares general-purpose financial statements (for example, for investors or regulatory bodies), those statements must follow accrual-based accounting under AASB standards.

Even if your business isn't required to use accrual accounting, adopting it early can save you time down the track. 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.

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 BAS, 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 Australian businesses need to use accrual accounting?

Not necessarily. The ATO requires the non-cash (accrual) basis for GST reporting only if your GST turnover is $10 million or more. Businesses below that threshold can choose cash accounting for GST purposes, though 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.