Accruals
Accruals are money earned or spent but not yet paid. Here's how they work and why they matter.
Published Friday 24 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 yet paid or been paid for.
- Accrued revenue is money owed to you, while accrued expenses are money you owe others.
- Accrual accounting records income and costs when they're earned or incurred, not when cash moves.
- In Hong Kong, profits tax is worked out on an accrual basis, so accruals matter at year end.
What are accruals?
Accruals are amounts of money that have been earned or spent but not yet paid. They let you record a transaction in the period it happens, even when the cash arrives or leaves later.
Accruals cover money coming in and money going out. Money coming in is income you've earned but haven't collected yet, such as a job you've finished but not been paid for. Money going out is a cost you've taken on but haven't settled, such as a bill you've received but not paid.
Accruals on the balance sheet
Accruals sit on your balance sheet until the cash follows. Where they land depends on who owes whom.
- An accrual is an asset when the money is owed to you, because you expect to receive it.
- An accrual is a liability when you owe the money, because you'll need to pay it out.
Accrued revenue vs accrued expenses
Accruals have 2 sides. Accrued revenue is income you've earned but haven't received, and accrued expenses are costs you've taken on but haven't paid.
Splitting them keeps your books accurate. Accrued revenue shows what's still owed to you, while accrued expenses show what you still need to settle.
Here are some common examples:
- unpaid customer invoices for work you've delivered, which count as accrued revenue
- a completed project you haven't billed for yet, which counts as accrued revenue
- wages your staff have earned but you haven't paid, which count as accrued expenses
- utilities you've used but haven't been billed for, which count as accrued expenses
- interest on a loan that's built up but you haven't paid yet, which counts as accrued expenses
Accrual accounting vs cash accounting
Accruals sit within 2 main accounting methods. The difference comes down to timing: when you record a transaction in your books.
Accrual accounting records income when it's earned and costs when they're incurred, whether or not the money has moved. Cash accounting records income and costs only when the cash actually arrives or leaves. For a fuller side-by-side view, see our guide to cash vs accrual accounting.
Why accruals matter
Accruals follow the matching principle, which pairs income with the costs that helped earn it in the same period. This gives you a truer picture of how your business is really performing.
Without accruals, a big unpaid bill or an uncollected invoice could make a single month look far better or worse than it was. Matching your revenue and costs to the right period keeps your profit figures honest, so you can make confident decisions.
How to record an accrual
You record an accrual with a journal entry that follows double-entry bookkeeping. Every entry has 2 sides that keep your books balanced.
To record an accrued expense, follow these steps:
- Identify the cost that belongs to this period but hasn't been paid.
- Debit the relevant expense account to recognise the cost.
- Credit an accrued liability account to show the amount you owe.
- Reverse the entry next period once the payment goes out.
Here's a worked example. Say you receive a HK$5,000 electricity bill in June for power you used that month, but you don't pay it until July. In June you debit utilities expense HK$5,000 and credit accrued expenses HK$5,000, so June's profit reflects the true cost.
Reversing accruals
A reversing accrual undoes the original entry at the start of the next period. This stops the same cost or income being counted twice.
In the electricity example, you reverse the June accrual on 1 July. When you then pay the HK$5,000 bill, you record it once as a normal payment, and your books stay accurate.
Accruals and your Hong Kong tax return
Accruals also shape what you report to the Inland Revenue Department. Hong Kong profits tax is assessed on your assessable profits, which are worked out on an accrual, or earnings, basis.
This means income you've earned and costs you've incurred count towards the year they belong to, even if the cash moves later. So your year-end accrued income and accrued expenses, including accounts receivable, need to be recorded accurately before you file.
Track your accruals automatically with Xero
Keeping accruals organised by hand takes time you'd rather spend on your business. Xero records your income and costs in the right period and keeps your balance sheet up to date, so your profit figures stay accurate all year. Ready to keep your accruals in order? Get one month free.
FAQs on accruals
Here are answers to some frequently asked questions about accruals to help you apply them with confidence.
What is the difference between accrued and accrual?
"Accrued" describes a single item that's been earned or incurred but not yet paid, such as accrued wages. "Accrual" is the wider accounting method that recognises these items when they happen.
What is the difference between accrual and cash accounting?
Accrual accounting logs a transaction when it's earned or incurred. Cash accounting logs it only when the money actually changes hands.
How do you record an accrual?
You post a balanced journal entry that debits an account and credits another in the period the transaction belongs to. You then reverse it in the next period once the cash settles.
What is a reversing accrual?
It's an entry that cancels a previous accrual at the start of the following period. This keeps you from counting the same income or cost twice.
Why do businesses use accruals?
Accruals match income with the costs that earned it, giving a clearer view of profitability. They also keep reporting consistent for lenders, investors, and tax purposes.
Related terms
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.