Accruals
Accruals record income and expenses when they're earned or incurred, not when cash actually moves.
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 record income and expenses when they're earned or incurred, not when cash actually moves.
- The two main types are accrued revenue, money you've earned but not yet received, and accrued expenses, costs you've incurred but not yet paid.
- You record accruals with a journal entry, then reverse it once the cash is received or paid.
- Accruals show up on both your balance sheet and your profit and loss statement, giving you a truer picture of how your business is doing.
What are accruals?
Accruals are amounts of income or expenses that you record in the period they're earned or incurred, even though no money has changed hands yet. In other words, accruals match revenue and costs to the time they relate to, rather than to the day you get paid or pay a bill.
This approach is the basis of accrual accounting, which most growing businesses use. It gives you a more accurate view of profitability than simply tracking cash in and cash out.
Common examples include unpaid invoices you've issued, sales taxes you owe, and salary and wages your staff have earned but you haven't paid yet. Each one belongs in your books now, because the underlying activity has already happened.
Accruals vs cash accounting
The difference between accrual accounting and cash accounting comes down to timing. Accrual accounting records a transaction when it's earned or incurred, while cash accounting records it only when money is received or paid.
Say you send a client an invoice in March and they pay in April. Under accrual accounting you record the income in March, when you did the work. Under cash accounting you'd record it in April, when the payment landed.
Cash accounting is simpler and shows you exactly how much money you have on hand. Accrual accounting takes more effort, but it links income to the costs that helped earn it, so your reports reflect what your business actually achieved in a period.
Types of accruals
Accruals fall into two broad groups, depending on whether they relate to money coming in or money going out. Both keep your accounts aligned with the period the activity happened in.
Accrued revenue
Accrued revenue is income you've earned but not yet been paid for. If you complete a project in June but invoice in July, the income is accrued in June and sits as an asset until the payment arrives.
Accrued expenses
Accrued expenses are costs you've taken on but not yet settled. Interest that's building up on a loan, or electricity you've used before the bill arrives, are both accrued expenses that belong in the current period.
Prepayments and deferrals work the other way around. A prepayment is money you've paid in advance for something you'll receive later, such as annual insurance, while a deferral is income received before you've earned it, such as a customer deposit. Accruals recognise activity ahead of the cash, whereas prepayments and deferrals recognise the cash ahead of the activity.
Examples of accruals
Worked examples make accruals easier to picture. Here's how the three most common ones show up in a small business's books.
Unpaid invoices
You finish a RM8,000 job on 28 June and send the invoice the same day, with 30 day payment terms. You record RM8,000 as accrued revenue in June, so the income sits in the month you did the work, even though the cash arrives in July.
Sales taxes
You make taxable sales during a quarter and collect service tax on top of your prices. That tax isn't yours to keep, so you accrue it as a liability as each sale happens, ready to pass on to the tax authority when the return is due.
Salary and wages
Your pay period ends on 25 June, but you pay staff on 5 July. The wages earned from 26 to 30 June are accrued as an expense in June, matching the cost to the month your team actually did the work.
How accruals are recorded
Accruals rely on the matching principle, which says you should record income and the expenses that helped earn it in the same period. This keeps your profit for each period honest, rather than lumpy depending on when cash moves.
To record an accrued expense, you enter a debit to an expense account and a credit to an accruals liability account. When you later pay the bill, you reverse that entry, so the cost isn't counted twice.
Accrued revenue works in reverse. You debit an accrued income asset account and credit a revenue account when you earn the money, then reverse the entry once the customer pays. Recording and reversing this way keeps each period clean and accurate.
Where accruals appear in your accounts
Accruals touch two of your main financial statements at once. Where they land depends on whether they're revenue you're owed or an expense you owe.
On the profit and loss statement, accruals affect your reported profit for the period. Accrued revenue lifts your income and accrued expenses raise your costs, so the statement reflects everything that happened, not just what was settled in cash.
Why accruals matter for your business
Accruals matter because they give you a truer picture of how your business is performing. When income and costs land in the right period, you can see real profitability and make more confident decisions.
They also keep you aligned with recognised accounting standards. Businesses in Malaysia reporting under the Malaysian Financial Reporting Standards (MFRS) or the Malaysian Private Entities Reporting Standard (MPERS), both of which follow international standards, use accrual accounting as the basis for their financial statements.
The trade-off is more admin. Accrual accounting takes more tracking than cash accounting, since you're recording amounts before money moves and reversing entries later. Good accounting software takes most of that work off your plate.
Track accruals accurately with Xero
Keeping accruals accurate by hand can eat into the time you'd rather spend running your business. Xero brings your invoices, bills, and journals together in one place, so income and expenses land in the right period without the manual chasing.
You can raise invoices, record bills, and post journal entries as activity happens, then let your reports reflect a true view of profit across each period. To see how it works for your business, sign up and Get one month free.
FAQs on accruals
Here are answers to some frequently asked questions about accruals to clear up the finer points.
What is the difference between an accrual and a prepayment?
An accrual records an expense or income before the cash moves, while a prepayment records cash paid in advance for something you'll receive later. Accruals recognise activity first, prepayments recognise payment first.
What is the difference between accrued and accrual?
An accrual is the accounting concept of recording income or costs when they're earned or incurred. Accrued is the adjective for a specific amount treated that way, such as accrued revenue or an accrued expense.
Is accrual accounting required in Malaysia?
Businesses preparing financial statements under MFRS or MPERS use the accrual basis, so it applies to most companies. Very small or informal operations may still use cash accounting for simple day-to-day tracking.
What is the difference between an accrual and a deferral?
An accrual recognises income or expenses before the cash is received or paid. A deferral does the opposite, holding cash you've already received or paid until it's actually earned or used.
How do accruals affect the balance sheet?
Accrued revenue appears as an asset because you're owed money, and accrued expenses appear as a liability because you owe money. Both balances clear once the related cash is received or paid.
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.