Study Notes: Business Finance & Accounting

Accruals

Before the final accounts of a business are completed, it is usually necessary to make adjustments to the trial balance.

For example, some transactions may not yet have been completed (e.g. a supplier has not sent an invoice for goods or services that have already been received).

Some transactions recorded in the accounts may relate to a future accounting period (e.g. a payment has been made for an advertising campaign that will run several months in the future).

Accruals are a common example of the adjustments made before the accounts can be finalized.

Accruals arise out of the process of matching expenditure or income to the accounting period in which it was incurred rather than paid.

The accruals concept – one of the fundamental accounting concepts – requires that costs and revenues are recognised in the accounts when incurred or earned – not when the money is received or paid.

An accrued cost is an estimate of the cost of something that has been incurred – and is owed – but which has not yet been recorded by the accounting system.

Accrued income is an estimate of the income that is due from a transaction but which has not yet been recorded (e.g. a sales invoice has not yet been raised).

So:
- Any money that is owed by a business in the current accounting period must be accrued and added to expenses in the profit and loss account

- Any money that is owed to a business in the current accounting period must be accrued and added to income in the profit and loss account