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  £20,000

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.

What is a Prepayment?

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