What is an accrual?
Definition of an accrual
An accrual is a cost that you've had the benefit of, but you haven't yet been billed for.
Example of an accrual:
If you pay for your electricity in arrears, then you may wish to accrue for it, for example if you are billed every quarter in arrears then you might post monthly entries to show your use of electricity every month.
More information about accruals
When you enjoy the benefit of a cost which you haven't yet been billed for, you accrue that cost on your business's balance sheet. An accrual is a liability of the business. Once the bill comes in, the cost moves from the balance sheet to the profit and loss account, and becomes a day-to-day running cost of the business.
If you review your accounts quarterly or annually rather than monthly, you may not need to post accruals.
If your business is registered for VAT, then you always account for accruals net of VAT.
Frequently Asked Questions
What’s the difference between an accrual and a trade creditor?
An accrual is different from a trade creditor because you haven’t yet had the bill for a cost that you accrue, whereas for a trade creditor, your supplier has already sent you the bill.
Got questions? Ask Emily!
FreeAgent's Chief Accountant Emily Coltman is available to answer your questions in the comments.