Accruals and The Accruals Concept

As part of our Accounting Dictionary series we’ll be discussing accruals and the accruals concept as part of this post. We’ve included both of these together as they will help you to understand each item.

So whats and accrual?

You’ll hear accountants speak about accruals and it’s opposite prepayments on a regular basis. You use these to effectively shape the management accounts on a monthly basis and to ensure that costs are properly apportioned to each month correctly. An accrual is made for a cost that you expect but which you’ve not yet had any formal invoice. Probably the best way to visualise this is to think about a utility bill. These typically are sent quarterly but from an accounting point of view we would try to show an even cost throughout the year. So if you get a utility bill every three months for say £3000 we would effectively make an accrual of £1000 per month (to even it out over the year) and then release the accrual each time the bill actually arrives. Make sense?

The accruals concept is REALLY important

Hopefully you’ve heard of the accruals concept (or as it’s frequently referred to the matching concept). In it’s simplest form it means that sales and costs should be accounted for in the same period i.e matched. This is a fundamental to accounting because it gives a true and fair view of what’s happening from and accounting perspective. A profit and loss will be prepared using the accruals concept.

Let us know if you have any questions regarding accruals and the accruals concept in the comments