Definition: An accrual is an expense incurred in a period for which no invoice had been received at the end of that period.
Accruals are amounts unaccounted for yet still owing at the period or year end. If the amount is not known estimates need to be made and then added to the expenses in order for this to show a true picture in the Profit and Loss account.
The purpose of accruals is that in each period, the books have been kept as accurate as possible
Accruals are those items where
- the benefits have already been taken by the company but the payments are not yet paid, or
- services which already have been provided but payment is not received yet
Example: rent accrued for previous 6 months but not yet paid.
Accruals can be done both at income and costs. In both cases, it is about prepayments and arrears payments.