What are accruals?

Published Thursday 23 July 2026

Table of contents

• What are accruals in accounting?
• Types of accruals
• How do accruals work?
• Accruals vs cash basis accounting
• How to record accruals
• Why are accruals important for your business?
• Simplify your accruals accounting with Xero
• FAQs on accruals

Key takeaways

• Accruals are amounts your business has earned or spent but not yet received or paid. They help you see the full financial picture, not just what's in your bank account right now.
• There are two main types: accrued expenses (bills you owe but haven't paid) and accrued revenue (money you've earned but haven't received).
• In the UK, limited companies must use accrual accounting. Sole traders can use cash basis as the default, but many opt for accruals to get a fuller financial picture.
• Recording accruals means your accounts reflect what's actually happened in your business, which helps with tax returns, cash flow planning, and securing finance.

What are accruals in accounting?

If you've ever delivered work to a customer but not been paid yet, or used electricity you haven't been billed for, you've already encountered accruals. Understanding how they work helps you keep your books accurate and your business decisions on track.

Accruals are amounts of money that have been earned or spent but not yet paid. They exist because business transactions don't always line up neatly with when cash actually changes hands. A sale might happen in March, but the payment might not arrive until April.

On your balance sheet, accruals show up in 2 places. If someone owes you money for work you've done, that's an asset (accrued revenue). If you owe money for something you've already used or received, that's a liability (accrued expense).

Businesses track accruals so their financial records reflect what's genuinely happened, not just what's landed in the bank. This gives you a much clearer view of how your business is performing at any point in time.

Types of accruals

Accruals generally fall into 2 categories: expenses you owe and revenue you're owed. Knowing the difference helps you stay on top of what's coming in and going out.

Accrued expenses

Accrued expenses are costs your business has already incurred but hasn't paid for yet. These are recorded as liabilities because you owe the money to someone else.

Common examples include:

• Utility bills: you use electricity, gas, or water throughout the month, but the bill arrives later
• Wages and salaries: your team earns their pay throughout the month, but payday might not be until the end of it
• Rent: if your lease agreement means rent is paid in arrears, you've used the space before the payment is due
• Unpaid invoices from suppliers: you've received goods or services, but the invoice hasn't been settled yet

According to Xero Small Business Insights, invoices to UK small businesses are paid an average of 8.2 days late, making unpaid invoices one of the most common accruals to track.

Accrued revenue

Accrued revenue is income your business has earned but hasn't invoiced or received payment for yet. This is recorded as an asset because the money is owed to you.

For example, if you're a consultant who completed a project in June but won't send the invoice until July, that completed work counts as accrued revenue in June. The same applies if you provide ongoing services billed in arrears, such as monthly IT support or cleaning contracts.

How do accruals work?

Seeing accruals in a real scenario makes the concept much easier to grasp. Here's a straightforward example of how one works in practice.

Say you run a small bakery. In January, you use £400 of electricity to keep your ovens running and your shop lit. But your energy provider doesn't send the bill until February, and the payment doesn't leave your account until March.

Without accruals, your January accounts would show no electricity cost at all, making that month look more profitable than it really was. February's accounts would then get hit with a cost that actually relates to January.

With accrual accounting, you record the £400 as an expense in January, when the electricity was actually used. You also record it as a liability (an accrued expense) because you haven't paid it yet. When the bill arrives and you pay it in March, you clear the liability from your balance sheet.

The result is that each month's accounts reflect what actually happened in that month. This is called the matching principle, central to accrual accounting: you match income and expenses to the period they relate to, not the period the cash moves.

Accruals vs cash basis accounting

There are 2 main ways to record your income and expenses, and the one you use affects how your finances look at any given time. Here's how they compare.

With cash basis accounting, you record income when the money hits your bank and expenses when you pay them. It's simpler, but it can give a misleading picture. If a customer pays you in April for work you did in March, your March accounts won't show that income at all.

With accrual accounting, you record income and expenses when they're earned or incurred, regardless of when the cash moves. This gives a more accurate view of your business performance in any given period.

In the UK, cash basis has been the default accounting method for sole traders and partnerships since the 2024/25 tax year. The previous £150,000 turnover threshold was removed, so self-employed individuals can now use cash basis regardless of turnover. However, many growing businesses choose accrual accounting for the more detailed financial picture it provides.

Limited companies don't get a choice. Under UK company law, they must use accrual accounting to prepare their annual accounts, regardless of turnover.

How to record accruals

Recording an accrual involves a simple double-entry bookkeeping step. You don't need to be an accountant to understand the logic behind it.

When you record an accrued expense, you make 2 entries. First, you debit (increase) the relevant expense account, such as "electricity" or "wages." Second, you credit (increase) an accrued liabilities account on your balance sheet. This shows that the cost has been recognised even though it hasn't been paid.

When the bill arrives and you make the payment, you reverse the accrual: debit the accrued liabilities account (reducing what you owe) and credit your bank account (reducing your cash).

For accrued revenue, the process works the other way around. You debit an accrued revenue account (an asset, because you're owed money) and credit your revenue account.

If double-entry bookkeeping feels unfamiliar, that's completely normal. For complex scenarios, such as year-end adjustments or VAT-related accruals, it's worth working with an accountant who can make sure everything is recorded correctly.

Why are accruals important for your business?

Accruals aren't just an accounting formality. They have a direct impact on how well you can manage and grow your business.

• Accurate financial picture: your profit and loss statement reflects what's truly happened, not just what's been paid. This means fewer surprises at year end.
• UK regulatory compliance: limited companies are required to use accrual accounting. Getting it right keeps you on the right side of Companies House and HMRC requirements.
• Better decision-making: when your accounts show the real position, you can make confident choices about hiring, investing, or cutting costs.
• Tax planning accuracy: accruals help you match expenses to the correct tax period, which means your tax bill reflects your actual activity. This can prevent overpaying or underpaying.
• Securing finance: lenders and investors want to see reliable financial statements. Accrual-based accounts give them a trustworthy view of your revenue and obligations.

Simplify your accruals accounting with Xero

Keeping on top of accruals is much easier when your bookkeeping is automated. Xero connects to your bank and automatically imports transactions, so you can reconcile your accounts in a few clicks instead of manually tracking what's been paid and what hasn't.

With features like automated invoice reminders and real-time financial reports, you can see exactly where your business stands at any point. You'll spend less time on admin and more time on the work that matters. Get one month free.

FAQs on accruals

Here are answers to frequently asked questions about accruals.

What is the difference between an accrual and a prepayment?

An accrual records a cost or income that's already happened but hasn't been paid or received yet. A prepayment is the opposite: it's when you pay for something in advance, before you've used or received it.

Who needs to use accrual accounting?

In the UK, all limited companies must use accrual accounting. Sole traders and partnerships can use cash basis (now the default), but many choose accrual accounting for better financial visibility as their business grows.

What is the difference between an accrual and a trade creditor?

A trade creditor is a supplier you owe money to after receiving an invoice. An accrual covers costs you've incurred but haven't been invoiced for yet, so the exact amount may still be an estimate.

Do I need an accountant to manage accruals?

For straightforward accruals like utility bills or regular supplier payments, you can manage them yourself using accounting software. For more complex situations, such as year-end adjustments, it's a good idea to work with an accountant.