Accruals
Learn what accruals are, how they work, and how to record them for your South African business.
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 changes hands.
- They follow the matching principle, so each period’s profit reflects the activity that actually happened in it.
- Money owed to you is an asset and money you owe is a liability, and both sit on your balance sheet.
- In South Africa, SARS applies VAT on the invoice (accrual) basis by default, with a cash basis available to smaller businesses that qualify.
What are accruals?
Accruals are amounts of income you’ve earned or expenses you’ve incurred that you haven’t yet received or paid in cash. They let you record revenue and costs in the period they actually happen, rather than when money changes hands.
This keeps your books in line with the real activity of your business. Accruals sit at the heart of accrual accounting, the method most growing businesses use.
How accruals work: the matching principle
Accruals follow the matching principle, a core idea in accounting. It says you record income and the expenses tied to it in the same period, no matter when cash moves.
Say you use electricity in March but pay the bill in April. Under the matching principle, you record that cost in March, because that’s when you used it. This gives you a truer picture of what each month really cost to run.
In practice, the matching principle means you:
- record revenue when you earn it, not when the customer pays
- record expenses when you incur them, not when you settle the bill
- adjust your books at period end for anything still outstanding
Accrual accounting vs cash accounting
Accrual accounting and cash accounting differ in timing. With accrual accounting, you record income and expenses when they’re earned or incurred. With cash accounting, you record them only when money actually lands in or leaves your bank account.
The main differences come down to:
- timing: accrual records transactions as they happen; cash records them when money moves
- accuracy: accrual shows a fuller view of profit and obligations; cash shows your bank position
- suitability: accrual suits growing businesses with invoices and credit; cash suits very simple operations
In South Africa, this choice also affects value-added tax (VAT). The South African Revenue Service (SARS) treats VAT as an invoice, or accrual, based tax by default. Businesses whose taxable supplies don’t exceed R2.5 million may be able to elect the payments, or cash, basis under section 15(2)(b) of the VAT Act.
Registration matters too. VAT registration is compulsory once your turnover passes R1 million in any 12-month period. To weigh up which method fits you, read our guide to cash vs accrual accounting.
Types of accruals
Accruals come in a few forms, depending on whether money is owed to you or by you, and whether it relates to income or expenses. Here are the four you’ll meet most often.
Accrued expenses
Accrued expenses are costs you’ve incurred but not yet paid, like electricity used but not yet invoiced. You record them as a liability until you settle the bill, which links closely to your accounts payable.
Accrued revenue
Accrued revenue is income you’ve earned but not yet been paid for, such as work delivered before you invoice. You record it as an asset, because the customer still owes you.
Prepaid expenses
Prepaid expenses are amounts you’ve paid in advance for something you’ll use later, like annual insurance. You record the payment as an asset and expense it over the months it covers.
Deferred (unearned) revenue
Deferred revenue, also called unearned revenue, is money you’ve received before you’ve done the work. You record it as a liability until you deliver, because you still owe the customer.
Are accruals an asset or a liability?
Accruals can be either, depending on the direction of the money. It comes down to whether someone owes you or you owe them.
Accrued income owed to you counts as an asset, because you expect to receive it. Amounts you owe, like accrued expenses or deferred revenue, count as a liability. Both are recorded on your balance sheet, which shows what you own and what you owe at a point in time.
You can set out these figures using a balance sheet template to see the full picture.
How to record an accrual: a simple example
Recording an accrual takes two entries: a debit and a credit. The example below shows how it works for a common expense.
Say your business uses R2,000 of electricity in March but doesn’t get the invoice until April. To match the cost to March, you record an accrual at the end of March.
Here’s how to record it:
- Debit the electricity expense account by R2,000, which recognises the cost in March.
- Credit accrued expenses, a liability, by R2,000 to show you still owe the money.
When the invoice arrives in April, you reverse the accrual and record the actual payment. That keeps you from counting the same R2,000 cost twice. For more on posting entries like this, see our guide to record accounting transactions.
Common examples of accruals
Accruals show up across everyday business activity. Here are common ones you’re likely to record.
- Unpaid supplier invoices for goods or services you’ve received
- VAT you’ve collected but not yet paid to SARS
- Salaries and wages earned by staff but not yet paid
- Utilities like electricity and water used but not yet billed
- Interest building up on a loan but not yet due
Why accruals matter for your business
Accruals give you a clearer view of how your business is really doing. That matters for a few reasons in particular.
They keep your reporting accurate, matching income and costs to the right period. That accuracy helps you make better decisions, because your profit figures reflect real activity rather than the timing of payments.
They also help with tax. Recording accruals correctly means your year-end figures line up with the period SARS is taxing, so there are fewer surprises. Many small and medium businesses in South Africa report under IFRS for SMEs, which is built around accrual accounting.
Staying on top of this starts with solid habits, and our guide to small business bookkeeping walks through the basics.
Track your accruals with Xero
Xero brings your invoices, bills and bank transactions into one place, so recording and tracking accruals is far less manual. You get a real-time view of what you’re owed and what you owe, ready for reporting and tax time.
Set your business up with accounting software that keeps your books current, and you can get one month free when you get started.
FAQs on accruals
Here are answers to some frequently asked questions about accruals.
What is the difference between accrual and cash accounting?
Accrual accounting records income and expenses when they’re earned or incurred, while cash accounting records them only when money moves. Accrual gives a fuller picture, which is why it suits businesses that invoice or buy on credit.
Are accruals an asset or a liability?
It depends on direction: money owed to you is an asset, and money you owe is a liability. Both appear on your balance sheet.
When should you record an accrual?
Record an accrual at the end of an accounting period whenever you’ve earned income or incurred a cost that isn’t yet in your cash records. This keeps each period’s figures complete before you report.
What is the difference between accrued expenses and prepaid expenses?
Accrued expenses are costs you’ve incurred but not yet paid, recorded as a liability. Prepaid expenses are costs you’ve paid in advance for future use, recorded as an asset.
Do small businesses in South Africa have to use accrual accounting?
There’s no blanket rule forcing every small business to use accrual accounting, though those reporting under IFRS for SMEs use it. For VAT, SARS applies the invoice basis by default, with a cash basis available to smaller businesses that qualify.
Related terms
Learn more about accruals
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Balance sheet template
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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.