Accruals
Learn what accruals are, see common examples, and how they differ from cash accounting.
Published Thursday 23 July 2026
Table of contents
Accruals are amounts of money that you know will come or go from the business.
Key takeaways
- Accruals are amounts of money you've earned or spent but haven't paid or been paid yet, a bit like an IOU on your books.
- Accrued revenue is money you're owed, so it counts as an asset, while an accrued expense is money you owe, so it counts as a liability.
- Accruals sit on your balance sheet and feed into your income statement, giving you a clearer picture of your real profit.
- Accrual accounting records money when it's earned or incurred, whereas cash accounting waits until the money actually moves.
The term "accruals" sounds technical, but the idea behind it is simple. Here's a plain definition before we get into the detail.
What are accruals?
Accruals are amounts of money that have been earned or spent, but not yet paid. Think of them as an IOU on your books: money you know will come in or go out, even though it hasn't changed hands yet.
You use accruals to keep track of what's owed. That might be money coming in, such as payment from a customer for a job you've finished. Or it might be money going out, such as an amount owed to a supplier, an employee, or the tax office.
Recording these amounts when they happen, rather than when cash moves, is the basis of accrual accounting. It gives you a more accurate view of where your business really stands.
Accruals fall into 2 groups, depending on whether the money is coming to you or leaving you. Here's how each one works.
Types of accruals
Every accrual is either something you're owed or something you owe. That single distinction decides how it shows up in your accounts.
Accrued revenue
Accrued revenue is income you've earned but haven't received yet. You've delivered the goods or completed the service, so the money is coming to you. Because it's money owed to you, accrued revenue counts as an asset.
Accrued expenses
An accrued expense is a cost you've taken on but haven't paid yet. You've used the goods or services, so the payment is due to go out. Because it's money you owe, an accrued expense counts as a liability.
Accruals turn up in everyday business situations more often than you might expect. These examples show the most common ones.
Examples of accruals
You'll come across accruals whenever you've earned or spent money but the payment is still outstanding. Common examples include:
- unpaid invoices, where a sale has happened but the cash is yet to arrive
- GST/HST collected but not yet remitted to the government
- salary and wages earned by staff but not yet paid out on payday
Say you finish a $2,000 design project on 28 June and send the invoice the same day, but the client pays on 15 July. Under accruals, you record the $2,000 as revenue in June when you earned it, not in July when the cash lands. That way your June figures reflect the work you actually did.
Once you've recorded an accrual, it needs a home in your financial statements. Here's where each type lands and why the timing matters.
How accruals appear in your accounts
Accruals show up on your balance sheet as either an asset or a liability. Accrued revenue is listed as an asset because it's money owed to you, and an accrued expense is listed as a liability because it's money you owe.
They also feed into your income statement. Recording revenue and expenses when they're earned or incurred means your profit reflects the activity of that period, not just the cash that happened to move.
This is the matching principle at work. You match income to the expenses that helped earn it in the same period, so your results tell a truer story. For a fuller picture of how these amounts sit together, see the guide to assets and liabilities.
Accruals are one of 2 main ways to record money moving through your business. Comparing them with the cash method shows why the timing is such a big deal.
Accruals vs cash accounting
The difference comes down to timing. Accrual basis records income and costs when they're earned or incurred, while cash accounting records them only when the money actually changes hands.
Say you invoice a customer in March and they pay in April. Accrual accounting books the sale in March, when you earned it. Cash accounting books it in April, when the payment arrived.
Accrual basis gives you a more complete view of profit and obligations, which helps as your business grows. To weigh up both methods for your own situation, read the cash vs accrual accounting guide.
Tracking accruals takes a little more effort than counting cash in and out, so it's worth knowing what you get in return. These are the main benefits for a small business.
Why accruals matter for your business
Accruals give you a clearer, more honest picture of how your business is doing. They matter for 3 practical reasons:
- Accurate profit: matching income to the costs of earning it shows what you really made in a period
- Cash flow visibility: tracking what's owed to you and what you owe helps you plan ahead with confidence
- Year-end reporting: some businesses must account for accrued income and expenses when filing with the Canada Revenue Agency (CRA)
Getting accruals right means fewer surprises at tax time and better decisions the rest of the year.
Keeping on top of accruals is far easier when your accounting software does the heavy lifting. That's where Xero comes in.
Simplify your accounting with Xero
Xero brings your invoices, bills, and bank transactions together in one place, so recording what you're owed and what you owe stays simple. You get a clear view of your numbers and spend less time in the books when you get one month free.
FAQs on accruals
Here are answers to some frequently asked questions about accruals to clear up the finer points.
Is an accrual a debit or a credit?
It depends on the type: accrued revenue is recorded as a debit to an asset account, while an accrued expense is recorded as a credit to a liability account. Each entry has a matching side to keep your books balanced.
What is the difference between accrued and accrual?
"Accrual" is the general concept of recording money before it's paid, while "accrued" describes a specific amount that has built up, such as accrued revenue or accrued wages. They're closely linked, just used slightly differently.
What is the difference between accruals and cash accounting?
Accruals record income and expenses when they're earned or incurred, while cash accounting records them only when money actually moves. Accruals give a fuller view of profit and obligations.
Do small businesses have to use accruals?
Many small businesses can choose the cash method, but some are required to use accruals for CRA reporting depending on their structure and income. Check the current rules or ask an accountant if you're unsure.
Understanding accruals is easier when you know the related terms that sit alongside it. These glossary pages explain the concepts connected to accruals.
Related terms
To go deeper on accruals and how they fit into your wider finances, these Xero guides are a good next step.
Learn more about accruals
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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.