What is accrue?

In general terms to accrue is to accumulate and receive something in regular and sometimes increasing instalments over time. It is most often used in reference to the income, expense or interest accumulated by an individual or business.

There are, however, a number of different ways in which one can define accrue. In the world of accounting, an accrual is an adjustment method that tracks and records revenues and expenses that have been earned or incurred but not yet paid for.

How accrue works.

What constitutes an accepted and mandatory accrual is determined by national accounting standards agencies. However, the International Financial Reporting Standards (IFRS) issued by the IFRS Foundation and the International Accounting Standards Board (IASB) have increasingly standardised accounting definitions worldwide.

Types of accruals.

Accruals can range from accounts receivable and accounts payable to future interest expenses and tax liabilities.

Accrued revenue includes income or assets that an individual or company is owed for a service or good already rendered.

Accrued expenses can include salary accruals for when a company pays its staff for the full month’s work before the end of the month; supplier accruals for when a company obtains a good or service on credit to be paid later on and interest accruals for interest payments made prior to receiving a monthly invoice for a debt previously incurred. 

The accrual method is employed and seen as beneficial because it provides a more comprehensive insight into a company’s financial situation.

Under the traditional cash accounting method, which only counts payments made, a company could be deemed to be in good shape with $500,000 in the bank. However, should the company have $1m accrued in expenses that have not yet been paid for, it could be misled into overconfidence.

Detractors of the accrual method have argued that it is too complex, especially for smaller companies.