An accrual is an accounting adjustment made for costs that you have incurred but have not received a bill for.
One of the concepts underlying accounting is ‘Matching‘ – matching revenue with all the related costs for a specified period. It is this concept of matching upon which accruals is based.
Example of the Matching Concept in Accounting:
ABC Limited sells computers on eBay. During the financial year end 31 December 2017 ABC Limited has sold 100 computers at £500 each and it bought each of the computers in at a cost of £300 each. Its profit and loss account for the year looks like this.
|Turnover||£50,000||£500 x 100 computers|
|Costs||-£30,000||£300 x 100 computers|
Profit for the year is accurately stated because we can see that 100 computers were bought and sold.
Lets suppose ABC Limited’s supplier was late sending in their invoice for 2 of the computers sold to ABC and this was received after the year end on 5 January 2018 for £600.
100 computers were still sold during the financial year to 31 December 2017 but the accounting principle of matching must still be followed as the true costs are still £30,000. Therefore an accrual needs to be made for the missing invoice.
What is an Accrual?
An accrual is a book entry in the accounts for costs which have been incurred but a supplier has not invoiced for.
For ABC Limited an accrual needs to be made for the missing invoice for the 2 computers of £600.
What is the Accounting Entry for an Accrual?
The accounting entry for the accrual is:
Dr Costs £600
Cr Accruals £600
This journal entry needs to be reversed once the suppliers invoice is received on 5 January 2018. At this point the cost will be classified as a trade creditor.
If you are registered for VAT, your accruals should be made net of VAT.