In accounting and finance, an accrual – or accumulation – of something describes when interests or different investments add together over a period of time. But specifically on an accounting balance sheet, accruals are associated with liabilities and non-cash-based assets. Such accrual-based accounts include accounts payable, accounts receivable, goodwill, deferred tax liability and future interest expense.
In accounting, a separation of earned revenue or incurred expenses is separated from the actual flows of cash involved. This is applicable if, for example, you deliver a product sold to a customer but expecting the payment for it at a later stage. On your business balance sheet, you would recognise the transaction as revenue in its current income statement due to the agreement of sale and delivery of product. At the same time, the proceeds are counted as an accrued income (asset) on the balance sheet for that accounting period. Then, this accrual is then adjusted for once cash payment is received.
Where accrued revenue is recognised before cash is received, accrued expenses differ in that it is recognised before cash is paid out. An accrued expense is a liability whose timing or amount is uncertain because an invoice has not been received.
Accruals are also applied in payroll as well – such as in annual leave of sick leave in an employment contract. Additionally, accruals are also applied to length of service to employment (e.g. for long-service leave) as well as trial periods of new employees. With some employers, accrued leave can be rolled over of carried over into the next year – in which accrual-based accounting principles apply similarly.
These are just some of the basic concepts of how tax accounting firms in Melbourne apply accruals in their work. But the main advantage to take away from accrual-based accounting is that it gives a better picture of the efficiency of transactional processes. From there, it helps accountants and you, the account holder, ensure that you are receiving and paying monetary obligations in reasonable time. It can be quite confusing to track if you’re business is a little more complicated.