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Answer Posted / deep sharma
Accrual, in accounting, describes the accounting method
known as accrual basis, whereby revenues and expenses are
recognized when they are accrued, i.e. accumulated (earned
or incurred), regardless when the actual cash is received
or paid out.
E.g. a company delivers a product to a customer who will
pay for it 30 days later in the next fiscal year starting a
week after the delivery. The company recognizes the
proceeds as a revenue in its current income statement still
for the fiscal year of the delivery, even though it will
get paid in cash during the following accounting period.
The proceeds are also a deferred income (asset) on the
balance sheet for the delivery fiscal year, but not for the
next fiscal year when cash is received.
Similarly, a salesperson, who sold the product, earned a
commission at the moment of sale (or delivery). The company
will recognize the commission as an expense in its current
income statement, even though s-/he will actually get paid
at the end of the following week in the next accounting
period. The commission is also a deferred expense
(liability) on the balance sheet for the delivery period,
but not for the next period the commission (cash) is paid
out to her/him.
Unfortunately, the term accrual is also often used as an
abbreviation for the terms accrued expense and accrued
revenue that share the common name word, but they have the
opposite economic / accounting characteristics.
Accrued revenue: Revenue is recognized before cash is
received.
Accrued expense: Expense is recognized before cash is paid
out.
Accrued revenue (or accrued assets) is an asset, such as
unpaid proceeds from a delivery of goods or services, at
which such income item is earned and the related revenue
item is recognized, while cash for them is to be received
in a latter period, when its amount is deducted from
accrued revenues.
In the rental industry, there are specialized revenue
accruals for rental income which crosses month end
boundaries. These are normally utilized by rental companies
who charge in arrears, based on an anniversary of a
contract date. For example a rental contract which began on
15th January, being invoiced on a recurring monthly basis
will not generate its first invoice until 14th February.
Therefore at the end of the January financial period an
accrual must be raised for 16 days worth of the monthly
charge. This may be a simple pro-rata basis (eg 16/31 of
the monthly charge) or may be more complex if only week
days are being charged or a standardized month is being
used (eg 28 days, 30 days etc).
Accrued expense, in contrast, is a liability with an
uncertain timing or amount, but where the uncertainty is
not significant enough to qualify it as a provision. An
example is an unpaid obligation to pay for goods or
services received FROM a counterpart, while cash for them
is to be paid out in a latter accounting period when its
amount is deducted from accrued expenses.
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